High-Value Hotel Mortgages: Expert Guidance for Your Investment
Investing in a hotel can be a lucrative venture, whether you’re acquiring your first property or expanding your hospitality portfolio.
However, securing a high-value mortgage for a hotel comes with unique challenges when it comes to the finance.
At Kerr & Watson, we specialise in mortgages tailored to your needs.
Understanding High Value Mortgages for Hotels
A hotel mortgage is a type of commercial loan specifically designed to finance the purchase or renovation of hotel properties.
Unlike residential mortgages, these loans are assessed based on the business’s financial health and potential, rather than just the borrower’s personal financial status.
Why Do You Need a Specialist Hotel Mortgage?
Hotels are considered high-risk investments due to their dependence on economic conditions, seasonal fluctuations, and operational complexity.
As such, not all lenders are willing to provide mortgages for hotel purchases and the ones that do are often specialist or commercial lenders.
Find out Your Options
Key Factors Lenders Consider
When assessing your mortgage application, lenders will look at several critical factors. Understanding these can help you prepare a stronger case.
Industry Experience
Understanding your experience in the hospitality sector is crucial. Lenders are more confident approving loans for individuals with a proven track record of running successful hotels.
If you’re new to the industry, demonstrating strong business acumen and relevant experience in other fields can help your case, but it’s very much an individual basis.
Hotel Performance and Financials
The hotel’s past and projected financial performance will heavily influence the lender’s decision. Key metrics include:
- Occupancy Rates: High occupancy rates indicate a well-performing hotel.
- Average Daily Rate (ADR) and Revenue per Available Room (RevPAR): These figures give insight into the hotel’s profitability.
- Financial Statements: Lenders typically require 2-3 years of financial records to assess stability but all lenders have their own criteria.
Location and Market Demand
The hotel’s location plays a significant role in its success. Properties near popular tourist attractions, business hubs, or convenient transport links are seen as lower-risk investments. Lenders also consider the target market, whether it’s leisure travellers, business guests, or long-term residents.
Deposit Requirements
Most hotel mortgages require a deposit of at least 25% to 40% of the property’s value. The loan-to-value (LTV) ratio usually sits around 60%, meaning the larger your deposit, the better your chances of securing favourable terms. Your mortgage adviser will be able to explore the amount that would be needed based on the unique situation.
Debt-to-EBITDA Ratio
Lenders use this ratio to evaluate how well your hotel can manage its debts. A lower debt-to-EBITDA ratio indicates stronger financial health and reduces the lender’s risk.
How Much Can You Borrow for a Hotel Mortgage?
The amount you can borrow depends on several factors, including the hotel’s value, your deposit size, and the lender’s risk assessment. Typically, you can borrow up to 60% to 70% of the hotel’s value. However, if you have additional assets to use as security, some lenders may be more flexible, offering higher LTV ratios or even 100% financing.
Options for Borrowers Without a Deposit
If you don’t have funds for a traditional deposit, there may still be ways to secure a hotel mortgage.
Using other assets as collateral or providing a personal guarantee can sometimes help you access higher LTV loans.
How Interest Rates for Hotel Mortgages Work
Interest rates for hotel mortgages vary based on your financial situation and the perceived risk of the investment. Rates typically range from 2% to 6% above the Bank of England base rate. Here’s what affects the rate you’ll be offered:
- Low LTV Ratio: A lower loan-to-value ratio generally means more favourable rates.
- Solid Business Plan: A well-thought-out plan demonstrating the hotel’s potential for profit can also secure better terms.
- Lender Type: Mainstream banks often offer lower rates but have stricter criteria, while specialist lenders may accept higher-risk applications at higher rates.
Once all the paperwork is in order, the funds are released, and you become the proud owner of your hotel.
Alternatives to Traditional Hotel Mortgages
If a traditional hotel mortgage doesn’t fit your needs, the following may be alternatives:
Bridging Loans
Ideal for quick purchases, such as buying a hotel at auction. Bridging loans provide short-term financing but come with higher interest rates. As a result you need to be sure of your exit plan to avoid being stuck with a bridging loan.
Development Finance
For new builds or major renovations, development finance is a flexible option. Funds are released in stages, and you only pay interest on the amount used.
Commercial Remortgaging
If you already own property, remortgaging can free up equity for your hotel investment. This is a useful strategy if you have substantial assets and want to leverage them if a lender is comfortable with the situation.
Conclusion
Securing a high-value mortgage for a hotel comes with challenges, but with the right planning for the right situation, it is achievable.
By understanding what lenders look for and working with a broker like Kerr & Watson, you can look to secure the best possible terms for your investment.
Whether you’re buying your first hotel or expanding your portfolio, our team is here to help.
Get in touch with Kerr & Watson today for bespoke mortgage advice.
