With the ageing population on the rise, the importance of sound financial practices in care homes cannot be overstated.
However, due to complexity, navigating the financial aspects of a care home finance/mortgages can be challenging for a lot of investors.
For investors looking at this type of opportunity, understanding care home finance/mortgages is essential for ensuring the long-term well-being of residents occupying the security alongside getting the most out of your investment.
That’s where this informational article will hopefully come in handy.
In this informational guide, we’ll explore various financial aspects of commercial mortgages used to purchase care homes, from budgeting and cost management to funding sources and regulatory considerations.
So, without further ado, let’s get started.
Table of Contents
What Is Care Home Finance?
Care Home Finance refers to the financial aspects involved in running or investing in care homes in the UK. This can include things like buying a care home, managing its operating costs, and planning for future expenses.
Every care home security must comply with Care Quality Commission (CQC) guidelines, along with the challenge of offering competitive rates to residents.
As such, this can make profit margins often low and make it difficult to sustain a ready cash flow in which lenders will be required to approve your mortgage application and do their best to ensure repayment.
Additional elements affecting the cost of care include utility expenses, employee salaries, market competition, maintenance, and more. These costs of course play a part in establishing the margins available to repay the mortgage.
Care Home Mortgage Application Process
To secure a mortgage for a care home or nursing home, you’ll need to approach a lender specialising in the care sector.
Each application is evaluated individually, and the offer you receive will be based on how well you meet the criteria.
Here are steps to streamline the process:
Step 1: Gather Your Documentation
- Ensure you have the necessary paperwork for lenders to assess affordability and eligibility
- Documents typically required include credit rating information, a lease or tenancy agreement for your business premises, a business plan, proof of address and identity, bank statements covering the past three months, and trading figures for the past three years
- An accountant’s projection may also be required
Step 2: Prepare Evidence Of Industry Experience And Business Case
- Demonstrating prior experience in the care sector is crucial for a care home mortgage application
- Lenders are more inclined to accept if you can showcase substantial industry experience
- Specific guarantees for care home purchases include a recent Care Quality Commission (CQC) report, with most lenders requiring a minimum “good” CQC rating
- Occupancy rates information is vital, as low rates may raise concerns about the business’ profitability and ability to repay the mortgage.
- Property suitability matters as lenders often prefer newer properties for easier adaptation to care home needs
- If you plan to employ a professional team to manage the care home, lenders will need proof of their qualifications, typically a registered qualification of at least NV4 level 4
Step 3: Consult An Experienced Care Home Mortgage Broker
Missing any item while preparing the aforementioned documentation can jeopardise your purchase. As such, enlisting the help of a broker experienced in arranging care home mortgages is a wise move.
A skilled broker can ensure your application is complete and helps identify the most suitable lenders for this type of commercial mortgage, saving you time and potentially money.
Care Home Mortgage Cost
Care home prices usually span from approximately £400K to £2M in most UK regions, with considerably higher costs in London and other major urban centres.
Generally, care home operators opt for purchasing over leasing. Commercial mortgages function similarly to residential ones, distributing mortgages over various terms but can often take longer and have more stringent criteria.
For a commercial mortgage to purchase a care home, a deposit of about 40% is necessary, and borrowing less than £50,000 is not recommended and will limit the amount of available lenders.
Moreover, significant expenses will be incurred for the conversion and interior design of the care home in most cases. For instance, the interior must ensure resident safety, fire escape provisions, wheelchair accessibility, etc., which will add up to the costs.
Other amenities necessary in a care home include a fully-equipped catering kitchen,mobility-assisting lifts, etc.
Care Home Finance Terms
- Loan duration hinges on your specific borrowing needs, with most lenders considering terms ranging from 15 to 25 years.
- Interest-only options are typically accessible.
What Lenders Offer Care Home Loans?
As mentioned earlier, the increase in the ageing population has resulted in the rapid expansion of the care home market.
So, despite being a niche sector, major banks like HSBC and Barclays can modify their policies to accommodate care home mortgages through their commercial mortgage products.
Many specialist commercial lenders work with brokers, offering a broad product selection. Consequently, collaborating with a broker increases your chances of success in the first application attempt.
As a result, you’ll be able to avoid the credit repercussions of unsuccessful applications and save valuable time.
How To Find The Right Property For A Care Home
The success of your care home investment relies heavily on your property. So, when you acquire a property, various factors must be considered.
A good care home should offer many kinds of social, physical, interactive and educational activities. Additionally, ensuring proper privacy, property, and living arrangements is key.
Alongside this, recent legislative changes have made it more challenging to purchase and convert older properties due to the extensive modifications required, such as installing lifts and widening doorways.
As a result, many care home providers are opting for purpose-built properties.
Discovering a suitable property in the right location is difficult and an appealing, spacious building, ideally with gardens, may also command a high premium in many regions.
Alternate Ways To Fund A Care Home Purchase
1. Development Finance
If you plan to construct a new care home rather than purchase an existing property, development finance may be suitable.
It enables gradual access to funds as construction progresses, with interest paid on released sums. Development finance can also fund significant renovations.
2. Bridging Loans
Bridging loans may offer a quicker avenue to complete the purchase if you have a high enough deposit and an acceptable repayment strategy for the lender to clear the bridging loan within its required term.
Frequently Asked Questions
How much profit do care homes make in the UK?
The profit margins of the UK’s largest care home chains rose by an average of 18% during the pandemic (source). Smaller care homes, with registered managers, can make profits of around 35-40% from fees, which are approximately £250 per week per bed.
Do I need experience in care to get a care home mortgage or finance?
While experience in the care sector can be beneficial, it’s not always a prerequisite for securing a care home mortgage or finance. Lenders typically look at your credit history, business plan, and financial situation when making their decision.
Conclusion
Overall, securing the right mortgage is pivotal. So, whether you opt for a traditional commercial mortgage, consider bridging loans, leverage existing assets, or explore development finance, the choice should align with your individual circumstances and goals.
Nevertheless, careful evaluation and consultation with experienced brokers will help you navigate these financial avenues with confidence.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.
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