As a specialist mortgage broker that arranges finance for the hospitality (Travel and Tourism) business sector, we receive many early stage enquiries relating to the purchase of existing or start-up Guest Houses and B&Bs. These are some of the questions we are asked and might be useful to you.
Q: We are thinking of relocating and purchasing an existing Guest House as part of a “lifestyle change”, but have no experience of running this type of business. Can we get a mortgage to purchase it?
A: The answer is that you will need a commercial loan/mortgage. The lenders offering this type of loan use a system for assessing applications, which although it can be known by different acronyms or names, is most frequently referred to as the “3 Cs of credit”: Character, Collateral and Capacity.
Character: just as a residential mortgage lender would, the commercial mortgage lender will check the applicants’ personal credit history and conduct of any previous credit arrangements such as personal loans, credit cards etc.
Collateral: usually the lender will only be looking at the property you are buying, but they may be able to consider additional security, such as an unencumbered rent producing investment property.
Capacity: the lender will be looking at the applicants’ capacity to run a successful business, the business’ capacity to service their loan and other business costs and the applicants’ financial capacity to meet ongoing personal financial commitments. Underwriters will ask to see the accounts for the existing business and may also ask to see a Business Plan detailing the applicants’ intentions for the business. In the same way that a residential lender would look at other credit commitments that continue after completion of their loan, so would a commercial lender that was considering a Guest House mortgage loan.
In the case of an applicant with no previous experience applying for a loan to purchase a Guest House, the lender would be looking for transferable business skills that would indicate that the operator could reasonably maintain profit at the current level. In the case of lifestyle change applicants, with no direct experience in the hospitality business sector, capacity is a particularly important consideration for any commercial lender.
Q: We are thinking of purchasing a property and starting a B&B business, do we need Planning Permission to use it for this purpose?
A: It’s very difficult to give an unequivocal answer because the rules differ between Local Authorities throughout the UK.
In this case planning permission relates to change of use if the property is currently a residential property.
The term Change of use can be a little confusing as it can apply to Planning Permission or Building Regulations. Most Local Authorities consider the overall number of letting rooms available as a proportion of the total in the property when considering whether permission for a change of use is required. For example, if you were purchasing an 8 bedroom property, but were considering letting only 2 bedrooms, you might not need change of use permission, whereas if you were purchasing a 5 bedroom property and letting 2, then you almost certainly would need permission for a change of use. There are other factors that Local Authorities consider when deciding whether planning permission, change of use, is necessary and these factors can vary between authorities.
When it comes to planning permission, we would recommend you always consult the Local Authority Planning Department in writing and ensure that the person at the Dept. has the authority to give a determination on the matter. In the case of potential owners looking to obtain a mortgage to purchase a property to be used as a B&B, they will find that any lender’s legal Dept. will be careful about this area of Law.
If you are intending to develop the property, it is almost certain that planning permission will be required.
Q: Do we need to inform our existing residential mortgage lender, if we want to let 2 bedrooms of our substantial residential home out to paying guests as a B&B. The Local Authority has confirmed that planning permission is not required for change of use to business.
A: The answer is yes, you must.
Notwithstanding the fact that the Local Authority does not require a change of use to business, a residential mortgage lender is likely to class your activities as “using the property for business purposes”. This is forbidden by most residential lenders.