Whilst this type of mortgage isn’t the most common out there, if you are someone who is looking to purchase a pub, you may learn that finding a suitable loan can be difficult.
The first step of buying a pub is to take out a specific commercial loan to finance the purchase. Finding which requires guidance from the right information sources and brokers.
For people who have no experience with mortgages for pubs, there is plenty of information that you must be aware of before applying for one.
Aspects of the loan, such as the right mortgage type, current financial status, experience running a pub etc all factor into a successful application.
So, let’s explore pub mortgages and how you can take a loan out for your future commercial property without any snags.
Table of Contents
What Are Mortgages for Pubs?
As mentioned earlier, pub mortgages are a subtype of commercial mortgages that are designed specifically for properties like pubs, nightclubs and bars.
Unlike residential mortgages, where the borrower on the whole has to follow a mostly straightforward application process, commercial mortgages can quickly become complex.
Making matters more difficult is the relatively low number of lenders willing to provide commercial loans because of the risk such mortgages pose.
After all, a lender cannot always ensure that they will be paid back in full after providing the mortgage.
Owing to their specialist nature, the eligibility criteria, interest rates, and repayment terms for pub mortgages can sometimes be higher.
Types Of Mortgages for Pubs
As a prospective buyer of a pub, there are two kinds of mortgages that you may potentially consider: a leasehold pub mortgage and a freehold pub mortgage.
In the UK, leasehold mortgages are the most common type of commercial mortgage. On a very basic level leasehold would mean that you would own the property but not the land it is situated on. This makes the owner liable for property maintenance in addition to the regular repayments.
Additionally, the leasehold is not permanent, lasting for a set period. The lease period varies depending on the property so always make sure you check the length of the lease before entering into an agreement. Be aware with this type of arrangement you may be contractually obliged to buy your stock from a specific brewery.
On the other hand, a freehold pub mortgage is where you will own the property and the land it is situated as well as being able to purchase alcohol from wherever you like and would own the business indefinitely.
You will be the sole owner of the property once all the payments have been made and won’t have to worry about any existing leases on the property.
Pub Mortgages Eligibility Criteria
As with most mortgages, lenders will have a list of criteria that you must meet as an applicant. Being a high-risk mortgage, you can expect to jump through a few more hoops than a standard mortgage.
As such, gathering as much information about the mortgage you seek before you file an application is important.
Here is a list of eligibility requirements that you can expect from most lenders.
1. Experience With Running Pubs
Having prior experience running a pub can dramatically improve the chances of your mortgage application being accepted.
Typically, lenders prefer providing loans to candidates who have at least two years of experience running a pub.
This tells the lender that you have a solid enough grasp of the fundamentals of the business. Moreover, the lender can be assured that the chances of the pub underperforming are rather low.
And if you have high enough experience, some lenders may provide you with a lower deposit requirement or a decreased interest rate.
2. A Licence To Run A Pub
To run a pub, you must have a personal licence and a designated premises licence. This shows the lender that you are qualified by the government to conduct the sale of alcohol on the property.
Additional licences like the Level 2 Award for Personal Licence Holders can increase the chances of a successful application even further.
3. Affordability And Trading Accounts
The affordability of a pub is determined by the amount of money the business earns on a regular basis.
So, this can either be calculated on an individual basis for sole owners or for the business as a whole if co-founders are involved.
Additionally, the status of the previous trading account will also be factored in. You can expect a special emphasis on the earnings of your business before tax, interest, amortisation and depreciation.
4. Property Location And Type
The new location of your pub will play a significant role in the stability of the business, as certain locations tend to attract more customers.
Mortgaging a pub in a prime location can be considered a safer deal due to higher foot traffic.
On the other hand, a pub in a tucked-away locale will attract fewer customers and potentially earn the business less money.
This makes the mortgage a high-risk endeavour, something that may cause the interest rates and deposit amounts to be far higher.
5. Credit History And Debt
Debt and a poor credit file make it less likely for a lender to consider accepting a loan application.
Both of these factors mark you as a high-risk applicant, requiring you to pay a higher deposit, a higher interest rate, or both.
Conversely, if all debts have been settled and your credit file is spotless, the chances of your application being accepted increase dramatically.
Application Process for Getting A Mortgage For Pub
Finding a lender and fulfilling their eligibility criteria is the most difficult aspect of a pub mortgage.
Once you have done so, the application process is a matter of managing paperwork, consulting a commercial broker and filing the application to a lender.
Here’s a three-step breakdown of getting a mortgage for your future pub.
Step 1: Gather Paperwork And Draw A Business Plan
A business plan is a great way of showing a lender that you can manage a pub effectively. So, it’s important that you take your time and leave no effort spared while creating the plan.
Additionally, if you don’t have them already, apply for licences for alcohol sale as found on the gov.uk website. As mentioned earlier, they are vital to the success of your mortgage application.
Next, gather all the required documents, which include the trading accounts of the business, credit file, proof of identification, etc., and proceed to the next step.
Step 2: Consult A Commercial Broker
Present the collected paperwork to an accredited commercial broker who specialises in pub mortgages. This is a critical step to ensure the success of your application, as brokers can provide you with the best mortgage deals with minimal fuss.
Once the broker has assessed your documents, they will help you connect to the right lender and close the best possible deal.
Step 3: File The Application
After connecting to the lender, ask for the eligibility requirements and prepare accordingly. The broker will help you create an effective application to maximise the chances of a mortgage approval.
Once everything is said and done, wait for the lender to contact you and let you know about the status of the application.
Pub Mortgage Interest Rates and Costs
The costs of a pub mortgage don’t end after the application process, as there are certain expenses that you must keep in mind. These include the interest rate, setup costs and taxes like Stamp Duty Land Tax and VAT.
1. Interest Rates
The interest rate that you must pay for a mortgage can vary from one applicant to the next. Based on the applicant’s financial status and history, as well as the financial status of the business, you can expect it to be anywhere between 3% and 12% per annum.
2. Setup Costs
Lenders may demand an arrangement fee of 1.5% to 2% of the loan amount early in the application process. This amount is typically added to the loan since it can be considered to be a significant expense.
Legal fees and valuation fees are also to be considered, which vary based on the extent of the work done and the property value.
3. Taxes
The two major taxes that you must pay include the Stamp Duty Land Tax (SDLT) and VAT (Value Added Tax).
For commercial properties, the SDLT rates vary based on the mortgage type and the property value.
Freehold properties up to £150,000 have a 0% SDLT rate, which becomes 2% for the next £100,000 (the portion from £150,000 to £250,000).
And for the remaining amount (the portion above £250,001), the SDLT rate is at 5%.
As for leasehold properties, the SDLT rate varies based on the Net Present Value (NPV). In turn, the NPV is based on the total rent that you must pay until the end of the lease.
So, if the NPV is below £150,000, you must pay 0% SDLT for the pub. For the portion above £150,001 to £5,000,000, the law requires you to pay 1%, which increases to 2% for the portion above £500,000,000.
And as far as VAT is concerned, it is applicable to the purchase price and can be reclaimed once the deal is closed. Of course, this depends on whether VAT is applicable to the property in the first place.
Disclaimer: When it comes to taxes, this is just general advice and not to be relied upon as fact. When it comes to tax everyone’s position and circumstances are different and the rules are changing all the time. Only by seeking advice of a qualified tax professional can you be certain you are complying with all the relevant tax rules & regulations.
Frequently Asked Questions
1. Can a pub be remortgaged?
Remortgaging a pub can be done without any difficulties so long as the business is performing normally. If the pub is underperforming, the owner must provide a plan of action and an intent to reinvest the capital into the business for approval.
2. Is it possible to get a pub mortgage without a deposit?
Lenders typically require borrowers to offer some form of security so that they do not lose money on the mortgage. As such, the applicant must offer a different property that they have equity in to act as security for the lender.
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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