B&B and Guest House Mortgages

If your dream is opening a B&B or guest house, the first step towards making that dream a reality is securing the right finance option.

Whether you plan to convert your current home into a B&B, buy an existing one, buy a home to turn into a guest house, or build one from the ground up, this article explains your financing options, how to qualify for them and where to find the right advice.

How to finance a bed and breakfast property

Most B&B owners use the B&B as their own home as well as a base for their business. As a result, these properties don’t always fit neatly into the definition of either a residential or a commercial property.

So, there are three categories of mortgages that can be used to buy a B&B (or convert your property into a B&B) in the right circumstances.

You should consider all three before selecting the option that’s best for you.

• Residential mortgages are primarily intended to help you buy a home. If you’ll use a large portion of the property (e.g. 40-50%) as your home, you may be able to get a residential mortgage, as long as your lender consents to guests paying to stay there.
• Commercial mortgages are intended to help you buy business premises. If you won’t live in the property, or you’ll occupy just a small portion of it, you will likely need a commercial mortgage.
• Semi-commercial mortgages, also known as mixed-use mortgages, are intended to help you buy a property that you will use as a home and a business premises.

There’s a lot to consider when choosing the right mortgage for a B&B or guest house, but the good news is that there are brokers who specialise in B&B mortgages, and they have the knowledge, experience and lender contacts to make sure you secure the right deal for you.

Differences between a residential and commercial mortgage

To help you choose the right mortgage for your guest house, we’ve compared and contrasted the different types available.

If you’ve ever owned a home, you’re probably familiar with residential mortgages, but commercial and semi-commercial mortgages have some notable differences that you should be aware of…

Deposit requirements

Residential mortgages are often available with a 90% loan-to-value (LTV), meaning that you can borrow 90% of the total property value and will need a 10% deposit. Commercial mortgages have a lower LTV. Depending on the lender, it could be 80%, 70%, or 60%. So, you’ll need a much larger deposit to buy a B&B property with a commercial mortgage.

Mortgage term

Residential mortgages often have a 25-year repayment term, or sometimes up to 30 or 40 years. Commercial mortgages usually have a shorter term – typically 15 years. Repaying over a shorter term means that your monthly repayments will be higher.

Mortgage rates

Residential mortgage rates, at the time of writing, start at around 1.5%, while commercial mortgage rates start at around 2.5%. You may also need to pay higher product fees for commercial mortgages, as they require more administration from the lender.

Application process

Residential mortgage applications include an affordability assessment which is largely based on your income. For a commercial mortgage application, the assessment will be based primarily on your business plan and experience with guest houses.

Your lender may look at:

• Whether you have previous experience of successfully owning a B&B or guest house
• If the property you are buying is already in use as a B&B and, if so, how profitable it is
• Whether you will be making renovations and improvements, and how you will finance them
• How you intend to run the business, including whether you will employ staff
• What your targets are relating to occupancy and income, and how you intend to meet them.

The best way to navigate the application process is to use a broker who specialises in guest house mortgages. They can guide you through every step of it, help you with all of the paperwork, and make sure everything progresses smoothly.

Credit history

Both residential and commercial mortgage applications are the same in that your lender will conduct a full credit check to look at your history of borrowing and repayment. However, commercial lenders are more likely to overlook previous issues with credit if the rest of your application is strong.

Mortgage availability

The lenders that offer residential mortgages and commercial mortgages are also different. Because of the specialist nature of B&B mortgages, you’ll only have a select few lenders to choose from in either case.

Residential lenders

We found six lenders, including Nationwide and Newbury Building Society, who offer residential mortgages that allow the owner to use part of their property as a B&B.

They each have precise criteria defining when this is allowed:

• Some require that you occupy a minimum of 40% of the property yourself, while others require 50%.
• Some require that you rent out no more than two bedrooms to paying guests.
• Some require you to provide evidence of previous success in operating a similar business.

Due to the limited number of lenders and their strict lending criteria, applying for a residential mortgage for a B&B property comes with a high risk of rejection. You should be sure you fully understand the requirements of your lender and seek professional advice before you apply.

Commercial and semi-commercial lenders

Availability of commercial or semi-commercial mortgages for a B&B or guest house is largely determined by the deposit you have and the LTV you need.

• If you have a 20% deposit, we found one lender, Allica, who can provide an 80% LTV mortgage.
• If you have a 30% deposit, we found six lenders, including Lloyds Bank, who can provide a 70% LTV mortgage.
• If you have a 40% deposit, we found seven lenders, including Barclays, who can provide a 60% LTV mortgage.

The rates for these mortgages are vastly different, ranging from 2.5% to 8.99%. The product fees also vary significantly between lenders. You should thoroughly compare your options before applying for a commercial mortgage.

Choosing the right type of guest house mortgage

Based on the information above, you may have concluded that a residential mortgage will better suit your needs than a commercial mortgage. Indeed, a residential mortgage will typically be the cheaper option, but it won’t be viable if you’re investing in a larger guest house with a higher percentage of commercial floorspace.

For this very reason, residential mortgage lenders will often assess applications from B&B and guest house owners with a degree of scepticism. They’re aware of the temptation to misrepresent the usage of the property to qualify for a residential mortgage, so they will be sure to verify the details provided.

If you are approved for a residential mortgage and later found to have rented out more of the property than your application indicated, you will have broken your contract. In extreme cases, you could be asked to repay the loan in full and could have difficulty borrowing in the future.

It’s highly recommended that you seek expert help in choosing the right type of B&B mortgage for your circumstances. Working with an experienced mortgage adviser can also ensure that you correctly present your case to avoid any inadvertent errors in your application that could cause major problems later.

How much it will cost

Try our mortgage calculator below to work out what the repayments on your guest house mortgage could look like.

Other ways to finance a B&B purchase

A mortgage may not always be the best way to fund your B&B. For example, you may already own the property and need to borrow a small amount to convert its use.

Or you may be unable to secure a conventional mortgage at this stage of your project. Here are some other financing options that might suit you:

An unsecured business loan

If you’re borrowing a relatively small amount, i.e. less than £25,000, it can be difficult to do this through a mortgage lender. Instead, you could consider a business loan that you’ll repay over a shorter term (e.g. five years).

A bridging loan

If you need capital quickly to fund your project and intend to either sell the property or secure a commercial mortgage later, you could use a bridging loan. This will give you access to cash for a short period (usually up to three years) when you have a clear exit strategy to pay off the loan, so you don’t need to go through a full mortgage application.

Development finance

If you are building a B&B from the ground up or planning a complete renovation of a property, you could consider development finance. This gives you access to capital in several instalments, with the lender assessing the progress of your project before each new instalment is provided.

Development finance is usually offered as a short-term loan, repaid on an interest-only basis until the project is complete. As with bridging loans, you’ll need a clear exit strategy to repay the loan in full upon completion, either by selling the property or securing a conventional mortgage on it.

Releasing equity from another property

If you own another property and have built up equity in it, you could free up this capital via a remortgage and use it to invest in a guest house. Investors who own a number of these properties often use this option to expand their portfolio.

It may also be possible to refinance your home and use the equity to invest in a B&B.

Finding a broker experienced in B&B mortgages

Navigating the complexities of the B&B mortgage market is far easier with expert help. A specialist can tell you whether to apply for a residential, commercial, or semi-commercial mortgage. Then, they will ensure that your application meets the criteria a lender sets for that particular type of product.

We work with several brokers who specialise in mortgages for B&Bs and guest houses so, if you’d like to speak to one of them, we’d be happy to match you with the right person.

Simply make an enquiry online or call us on 0808 189 0463.