A commercial mortgage for a restaurant could allow you to purchase the premises you need to open your dream business but where do you start?
If you feel unsure about your options or feel nervous about whether or not you’ll get approved for a commercial restaurant mortgage, then this article can help.
Our team can answer any questions along the way, so don’t be shy. Use the online chat or contact form to quash any queries or call us if you’d prefer.
What is a commercial restaurant mortgage?
A commercial mortgage is a type of loan, usually taken out by business owners, or soon-to-be business owners who need finance to fund their project.
A commercial loan can also be used to:
Buy an investment property
Purchase land for development
How long does a commercial mortgage for a restaurant last?
Most commercial mortgage lenders provide loans with repayment terms between 5 to 40 years, though it’s more common for this type of finance to span over 25 years.
Usually, but not always, the longer the loan takes to repay, the more interest you’ll pay overtime, which is why some borrowers prefer shorter term lengths. However, in order to qualify for a shorter repayment term on your restaurant mortgage, you’ll need to prove that you can afford the loan and the larger repayments that will be required.
For example, if you were to get approved for a restaurant mortgage of £100,000 at an interest rate of 3.5%, your mortgage repayments would be £989 over 10 years. At the end of the mortgage agreement, you would have paid a total of £118,681, which would be £100,000 of your mortgage debt and £18,681 of interest.
In comparison, under the same interest rate but over 20 years, your repayments would be £580. Over the 20 years, you would repay your mortgage debt of £100,000 and the total interest of £39,230.
Therefore, although you would accumulate less interest with a shorter term, your repayments could be more manageable if you stretch your loan over a longer time frame.
How do lenders assess my eligibility for a hospitality mortgage?
Lenders want to feel secure in the knowledge that you will repay your debt so to assess the likelihood of you defaulting (not paying your mortgage on time and in full) they will look at various factors including:
Personal finances including your debt to income ratio
Your experience as a restaurant manager / owner
Future profit projections
Details and profiles of all directors and partners of the business
Asset and liability statements
The good news is that not all lenders are the same and even if you’ve been rejected for a commercial restaurant mortgage in the past, our brokers may be able to find you an alternative lender with criteria that suits your circumstances more.
How much deposit do I need to buy a restaurant?
Commercial mortgages tend to have higher deposit requirements in comparison to residential mortgages because the nature of the loan is deemed riskier by most lenders.
That’s not to say that you can’t find a lender with affordable deposit requirements as each one will have their own set of rules about their minimum deposits.
A typical deposit for a commercial restaurant mortgage could range between 25 to 40% but be aware that a higher deposit could be required if you have “issues” on your application such as low income, a lack of experience in the hospitality sector or bad credit.
If a lender agrees to provide you a LTV (loan-to-value) of 70%, you’ll need a 30% deposit. So, a property with a market value of £200,000 would require a £60,000 deposit.
What other costs do I need to consider when buying a restaurant?
Buying a restaurant can be an expensive purchase but knowing the costs involved ahead of applying for a commercial mortgage and then the building itself, can help you to budget and potentially save money. That’s where our brokers come in. They know the costs associated and can scour the market to find you the best deal with terms that suit your situation.
The average restaurant startup costs vary depending on the size, location and the type of restaurant you plan to open. For example, a small pop-up style restaurant may be cheaper to buy and run while an exclusive, 100 seat, up-market establishment could cost you more.
Here are some costs to consider:
Mortgage application fees
Licence / permit fees
Interior design and furnishing costs
Kitchen and cooking equipment
Technology costs including fast wifi,point of sales technology, OpenTable or other booking apps
Signage and other marketing costs including social media and website management
What are the benefits of working with a broker to find a restaurant mortgage?
Our brokers have access to a range of restaurant financing options with relationships with lenders right across the UK.
Using their knowledge of the market, they can quickly filter out any inappropriate lenders to prevent you from wasting your time applying to a lender that is likely to reject you or can’t offer you the terms you need.
Our team can appoint a specialist with real experience in commercial restaurant mortgages, so you know you’re in capable hands.
We can compare short term and long term lending options and calculate how this will affect your personal finances as well as your business’.
If you have a low deposit but have assets that you would like to use as security for the loan, our team can find the lenders who are willing to accept this and can negotiate more flexible lending criteria or more favourable interest rates.
Working with a broker also means that you have an expert on your side who can identify any unfavourable terms, as well as manage paperwork on your behalf.
Call us today on 023 8023 5555 and let us know about your plans to buy a restaurant. Whatever your circumstances, our brokers will strive to find an appropriate lender with rates and terms that work for you.