Cash in hand: applying for a pub mortgage

When applying for a pub mortgage where do you turn for advice? Michelle Perrett reports.

You've made the decision that it's time for a change and you want to buy a pub. But how are you going to afford it and where are you going to get finance to purchase the new property?

With interest rates low, increasing numbers of people are looking to buy their own pub property. At the end of last year the Abbey National building society reported a 45 per cent increase in the number of people taking out mortgages with it to buy the freehold of their own pub. Licensees should be aware that getting a mortgage to buy a business such as a pub is not the same as walking into a building society or bank when buying a house.

Purchasing a pub requires a much more specialised type of funding and even though there are many banks which are willing to give mortgages, there are a wide range of other funding sources, such as private lenders, where you could get a better deal.

It is important that you work with a reputable mortgage broker to assess just how much you can afford to pay for your property.

If you know your budget beforehand and add in the likely costs of removal, legal and professional fees, stamp duty and refurbishments then you can work out how much you can afford. A broker can also give the licensee an idea of the costs involved in setting up the finance, the amount of the loan and the loan terms.

Steve Chester, director at broker ChristieFirst, said: "It's a good idea for someone to talk to a broker in the first instance to get an initial assessment on their borrowing capabilities."

Also, a broker will be able to find the best deal by searching through a variety of lenders.

Lenders have a wide range of criteria for loaning money and the broker will be able to find the best deal for each individual. Brokers also have a wide variety of contacts with lenders and may be able to negotiate a better deal.

It is advisable to use a broker registered with the National Association of Commercial Financial Brokers (NACFB) as this means they have to work to a code of conduct which requires them to be "fair and reasonable".

Paul Thompson, partner in Acorn Commercial, one of the largest financial independent brokers, which runs the publoans.com website, said: "Wise people should be speaking to an NACFB broker as it's the only way you can guarantee reputable advice."

Issues such as the length of the loan, state of business you are purchasing, your credit history and how much experience you have in the pub industry can all affect the type of deal you get.

Mr Thompson said: "Someone with experience and a good credit history can get a fantastic rate.

"A lot of people are making the jump and are struggling to find the right property for them. But with interest rates so low it's still a good time to buy."

Mr Chester agrees that experience can also help a potential licensee to get funding.

"Experience helps, although it's not a pre-requisite but it may make a difference for someone who is looking to buy an underperforming business," he said.

"If the site is to be managed then experience is less of a requirement."

However, licensees need to be aware that the majority of lenders will not provide funding to a leasehold property as they will have very little security. Although it's not impossible to get funding for a leasehold, many banks will ask for some other type of collateral such as a house.

Licensees with some savings may be wise to consider buying a freehold property rather than taking on a lease.

"If a licensee has £20,000 in their pocket we could get them into a freehold," said Mr Thompson.

It is also advisable for licensees to listen to their broker about the property they are planning to purchase.

"A broker with exposure to the pub market should be able to comment on whether it's the right sort of price," said Mr Chester.

"Once the business has been identified that's where a broker comes in to identify the terms for the customer."

For freehold businesses, loans are generally up to 75 per cent of the purchase price while leaseholds are often restricted to 60 or 70 per cent.

"There are limited lenders for leases and interest rates are high but it's not to say you can't," Mr Thompson said.

Whether a leasehold is tied to a brewer or is free-of-tie can also affect the type of finance available for licensees.

A good lease that is free-of-tie, where the licensee can shop around for deals, would be more likely to get some funding.

With additional security such as a house, up to 100 per cent of purchase price can be obtained for both freehold and leasehold units but in all cases, the ability to pay the loan has to be shown.

Although a lender requires the licensee to guarantee the loan is secure and prove that it can be paid from the profits of the business it is important for a licensee to have a good relationship with their lender.

"People should view their lender as a partner in the business," said Mr Chester.

Abbey National - Lending criteria for pubs​

• Standard Scheme:​ Suitable for a business with a modest turnover and profits, or where there is a start-up element with an experienced operator, or a stronger business but a less experienced operator. The bank will limit itself to 75 per cent of bricks or mortar or 75 per cent of the purchase price if lower against a freehold or leasehold property.

Special Scheme:​ Available to those with relevant experience and the security of a medium to large pub showing good profits. The bank may offer up to 70 per cent of the value of the business including goodwill or 70 per cent of the purchase price, whichever is lower. The bank may require a specialist business report from its valuers. This loan must not exceed 90 per cent of the value of the business.

Advice from publoans.com​

The answers to the following questions will determine what loan package is available and the rate charged by the lender.

• how much experience do you have?
• is the outlet trading or closed?
• are the present owner's accounts available?
• why are they selling?
• what plans do you have for the outlet?
• do you have a clean credit history?

Possible finance deals​

Freehold pubs for experienced applicants​

Some deals available:

• over 75 per cent of bricks and mortar on closed up units and brewery sell-offs
• over 75 per cent of market value on open and trading units
• over 90 per cent of bricks and mortar for sitting tenant purchases, if you own the lease on the property.

Freehold pubs for first time buyers​

This price generally covers both the business - goodwill, fixtures and fittings.

Up to 70 per cent of the market value for "quality pubs".

Leasehold pubs​

The maximum loan available without other security is presently 70 per cent of the value/purchase price of a lease for the highest quality outlets. This can increase to 100 per cent of the purchase price if alternative acceptable security is made available (eg, a house or other property).

Information supplied from publoans.com​

How to get the finance​

• Licensees need a well-researched project that looks into the business, ie, considering the clientele of the pub and where it is positioned
• how the licensee will see the plans through
• what is expected in term of turnover and profit in a site.

Information supplied by ChristieFirst.​