Financing a Pub - How it Works
Purchasing a pub in the UK is both a sound business venture and a great way to have an exciting residential home - plus, the commute to work isn’t terrible.
But buying property that is both residential and commercial in nature does, however, require a specialist mixed-use mortgage as neither standard residential mortgages nor commercial mortgages are completely suitable.
At Clifton Private Finance, we are experts at finding the best mixed-use mortgages for those interested in becoming a pub landlord.
What is a Mixed-Use Mortgage?
Mortgages in the UK typically fall under two broad categories: residential and commercial.
Residential mortgages are designed to buy homes for people to live in, paid for through personal income and with risk for the lender that is assessed by analysing the borrower’s personal financial history. Residential mortgages tend to have higher loan-to-value ratios, lower interest rates, and regulations designed to protect homeowners.
Commercial mortgages are those used by a company to undertake their business. They include those for factories, offices, retail space, and hospitality venues - such as pubs. As commercial mortgages are paid for by the business turnover, the risk profile is completely different. Commercial mortgages can be tailored closer to the business needs, typically require greater deposits and are often for much shorter terms.
A mixed-use mortgage brings together a commercial and residential mortgage, providing the buyer with a combined mortgage that can be used to purchase property that has both a commercial and residential aspect to it - such as a pub.
The risk assessment for mixed-use mortgages takes into account both the business finances and forecasts, and your personal financial situation. It also offers a layer of consumer protection that is not part of a commercial mortgage portfolio.
The terms offered for mixed-use mortgages, however, tend to be closer to commercial mortgage offerings than residential ones meaning that at first glance, they can look most similar to commercial mortgages.
Why Do I Need a Mixed-Use Mortgage for a Pub?
A pub is a clear example of a property that combines both residential and commercial space. The ground floor is typically entirely used for business purposes as a hospitality location, while the upper floors are used as a home for the landlord (or in some cases, rented out to staff).
This is not without its benefits:
- Convenience - Living about your business is extremely convenient, removing the need for a commute while also separating living and working spaces.
- Cost-Efficiency - A mixed-use mortgage is more economical than obtaining two separate mortgages for your home and business.
- Financial Management - Having a single mortgage payment
- Security - Business security is greatly enhanced by your presence living above. This is particularly useful for pubs and other licensed venues.
- Social Life - Many pub landlords are extremely social people, enjoying the unique lifestyle of managing a pub and living above it.
Accounting - The Downside of a Mixed-Use Mortgage for a Pub
One of the biggest problems of mixed-use mortgages for a pub is the accounting. Do you pay some of the mortgage out of your personal finances and some from the business? Do you need to pay rent to the business? What’s tax deductible?
There are multiple ways to set up the accounting for a mixed-use mortgage and it is important that you speak to your business accountant to make sure it is all done accurately.
- One option is to consider the entire building as belonging to the business. In this case, you would pay rent to the business, which would then have that rent counted as income.
- Another option is to apportion a percentage of the mortgage as a personal expense and pay for that accordingly, with the remainder as a business expense. This could be done by using floor space to determine how much of the pub is business and how much is personal. Interest from the business portion would then be offset against corporation tax.
Another aspect is council tax, which will be levied on the residential portion, but not on the commercial side; and business rates, which must be paid on the commercial part of the property but will not be due for the living space.
Navigating these complexities can be difficult, but a qualified accountant will be able to easily apportion the property effectively and make sure everything is properly calculated.
Obtaining a Mixed-Use Mortgage to Buy a Pub
Getting a mixed-use mortgage does require a little work. The eligibility criteria can be quite specific and you will need to have strong financial credentials in both your personal and business finances.
The following will all be considered:
Your Personal Creditworthiness
As part of the mixed-use mortgage is for a residential home, it is only expected that your personal credit history will be under scrutiny. You should have a good, clean credit report and be able to show a reasonable level of disposable income. Just like a residential mortgage, a mixed-use mortgage for a pub will be stress tested, meaning your ability to pay the mortgage in the future should rates increase will be assessed.
Your Deposit
Unlike residential mortgages where loan-to-value can be as high as 95% - or even 100% in some circumstances - a mixed-use mortgage will have LTV much closer to a commercial mortgage. You need to be prepared to find a deposit between 25% and 40% of the property value.
The Business Plan
As running a pub is a business, you will need to qualify the loan application with a comprehensive business plan. This should include a detailed explanation of your pub venture, your market research and analysis, and essentially the forecast of turnover and business cash flow over the next five to ten years. It is beneficial to have your accountant work with you on your business plan to make sure that the figures are both accurate and also viable for the repayment of the mortgage.
Your Experience in the Industry
Many people do purchase a pub with a mixed-use mortgage as their first foray into the hospitality industry, so it is not impossible to buy a pub with no prior experience; however, if you do have a background in the industry you should leverage this, showing in your business plan that you have the knowledge needed to make the venture a success.
The Property
Another key factor in determining the mortgage viability lies not with you, but with the property itself. Lenders want to know that should everything go wrong, they can quickly and efficiently sell on a repossessed property to recoup any losses, so they are as interested in the value of the building as you are.
It is for this reason that it is harder to acquire a mortgage for a pub in a neglected condition than one that is already up and running smoothly.
If you do intend to purchase a run-down property and renovate it as part of your business plan, then being able to show experience and prior success in renovations would also be an advantage.
Other Funding Options when Buying a Pub
A mixed-use mortgage is not the only way to fund a pub purchase. You may like to consider the following ways to make your pub-owning dream a reality.
Multiple Mortgages
It’s messy, but possible. Taking out two individual mortgages - one residential and one commercial - can have its advantages.
First, each is assessed separately, so the residential mortgage would lean purely on your personal finances, while the pub’s commercial mortgage would focus on the business plan and business income.
Secondly, with different LTV and deposit criteria, it may work out more affordable for you to separate in this way.
There are other factors too, such as the tax complexities mentioned above being somewhat simpler. However, many mortgage lenders will ask the obvious question as to why you’d look to take out the mortgage(s) in this way and could look unfavourably on the situation.
If you are considering multiple mortgages rather than a single mixed-use mortgage, speak to a specialist advisor to be sure it’s the right move.
Investment
A pub is a business and that means it is of interest to outside investors. If your business plan is strong, then you might like to consider seeking angel investment or even looking to crowdfunding options.
Remember, however, that any capital investment is dilutive, meaning you will have to give up shares of ownership in your pub to acquire the funding. If you are looking for a sole ownership situation, this may not be suitable.
Grants and Schemes
Some local authorities and even the UK government offer grants and support to those looking to create or sustain businesses that invigorate the local community. It is worth researching to see if any financial backing is available.
Business Loans
Traditional business loans, such as unsecured startup loans, are unlikely to be large enough to fund the entire purchase, however they can offer additional financial support both in the pub purchase and in getting the business off the ground once you’ve moved in.
At Clifton Private Finance we are experts in the vast range of business finance that’s available to help you with startup costs, expansion, and ongoing cash flow. Speak to us today to learn more about how business loans can help your pub venture.
Auctions and Bridging Finance
Bridging finance provides an alternative to a mixed-use mortgage for many prospective pub owners. With more flexible criteria and a rapid application process, bridging loans are perfect for buying a pub at auction - something that’s almost impossible with a mortgage alone due to the speed needed in securing the financing.
With a mixed-use mortgage as an exit strategy for your bridging loan, it is possible to use the purchasing power of bridging finance to buy a property at auction, potentially getting an incredible deal on the cost of the pub.
Bridging finance also offers you a way to buy a pub in a poorer condition than your mortgage allows, and renovate it to a liveable standard to make your mortgage viable. The mortgage can then be acquired and used to pay off the outstanding bridging loan.
For further advice on bridging loans when buying a pub, speak to our experts at Clifton Private Finance.
Leasing and Rent-to-Buy
It may be that you cannot support the financing criteria needed to buy a pub outright. It may be worth looking into leasing and rent-to-buy schemes. With the latter, you pay rent to the current owners until such a time that you are in a better position to obtain a mortgage at which time you move to full ownership; a portion of the rent paid is then offset against the purchase price of the pub.
Rent-to-buy is an excellent way to build up your business and show strong financial stability to prospective mixed-use mortgage lenders.
Additional Financial Considerations when Buying a Pub
Obtaining your mortgage and buying your pub is only one step towards your business success. Owning a pub will come with many financial challenges during the years - but thankfully the support exists to help you have a smooth and rewarding experience.
At Clifton Private Finance, our team of expert advisors can help you with every aspect of funding for your pub business:
- Mixed-use mortgage advice and application.
- Startup business funding to give you the capital you need to get off the ground.
- Business loans for growth.
- Cash flow finance to smooth difficult seasonal periods.
- Asset finance for furniture, fittings, and the latest equipment.
- Bridging loans to take full advantage of unexpected opportunities.
- Refinancing for reassessment of funding and to get the benefit of superior rates.
- Remortgaging options for later building improvements and expansion.
Speak to one of our specialist team today to see how a mixed-use mortgage can meet your needs for buying a pub.
Commercial Finance For Pubs
Buying and running, or buying a pub to develop and sell, could be an expensive but rewarding venture, especially if you find the right property and location.
There are a number of costs associated with the purchase of a pub including the purchase price, planning permission, potential licensing costs, legal fees, development costs and other unforeseeable costs.
In addition, there are certain expenses that you will incur if you are looking to start running a pub. For example, you will likely need working capital to pay staff salaries, cleaning costs, utilities, drinks, equipment hire, insurance, repairs and miscellaneous costs such as beer garden equipment.
The aforementioned costs could run into the hundreds of thousands. Unless you have access to a substantial amount of capital, then you will probably need to approach a lender for funding.
Traditional Lenders
The commercial market is competitive, which often means having readily available finance could be the difference between securing your pub and losing out to another buyer. In any commercial venture, time is of the essence.
It may not be your best option to approach a traditional lender for commercial finance, as traditional lenders’ applications can take up to several weeks or months to process.
It is possible to access commercial finance when time is tight through specialist lenders. If you need commercial finance, it is advisable to contact a professional broker.
Clifton Private Finance
Here at Clifton Private Finance, we can secure the commercial finance you need for your pub project. We have an extensive network of lenders who are prepared to provide commercial finance to suit your financial needs.
