If you’re looking to buy a care home you may be wondering about your mortgage choices. In this article we look at the various types of care home finance available in the UK and how to secure the right type for your business.
Can you get a care home mortgage?
Care home mortgages are not a specific product, but if you’re buying a care home, there are lenders who will approve commercial mortgages for this purpose. As a business product, commercial mortgages are more costly than typical residential mortgages, but there are plenty of options available for those looking to secure this type of loan.
Lenders that offer care home mortgages have niche requirements related specifically to operating a business in the UK care home sector, so preparation is key if you plan to apply for one. You’ll likely need to show competency and regulatory compliance within the industry, alongside the typical affordability and creditworthiness mortgage lenders look for.
It’s also important to understand that a commercial mortgage is not the only type of care home finance available. Speaking to a mortgage broker with experience in this industry can help you review all of the funding options available and provide you with access to those specialist lenders operating in this niche.
How to get funding to buy a care home
If you’re looking to obtain funding to open a care home in the UK there are various options available. Which type of finance is suited to your needs will depend on both your business’ circumstances, and whether you plan to purchase or remortgage an existing care home, renovate a building into a care home, or build one from scratch.
The following types of commercial finance for care homes may suit your needs:
Commercial mortgage
Some lenders provide commercial mortgages for the purpose of buying a care home. This is likely the best option for those buying an existing care home, or remortgaging their current facility. That said, commercial mortgage lenders often have more flexibility in terms of the type of applications they endorse, so it may be possible to fund renovation works through a traditional commercial mortgage.
Bridging loan
Bridging loans are a short term form of finance that are often used to facilitate a quick purchase, or as temporary funds while you free up equity from other assets to pay for a new purchase. For example, if you want to buy a new care home before you’ve completed the sale of another business asset intended to fund the new facility.
They can also be used if you plan to buy a property at auction, as bridging finance can be arranged very quickly. However, you will typically pay higher rates than on a commercial mortgage, and you’ll need a clear exit strategy, such as sale of another asset or refinancing onto a commercial mortgage once you’re able to arrange one.
Development finance
Development finance will be most useful for those planning to build a new care home from scratch, or potentially those carrying out substantial refurbishment to an existing property.
Development finance funding is drawn down in stages that align with phases of the building works. This means you’ll only pay interest on the funds released to date. This can represent large savings during the building process compared to other finance types, which would charge interest on the full loan amount from day one.
Similarly to bridging loans, development finance is a short term funding option that will require an exit strategy post-development, such as a commercial mortgage on or sale of the complete care home.
Remortgaging to release equity
If you already own a care home that you wish to expand, or perhaps you plan to add another care home to your portfolio, it may be possible to remortgage to release equity from another property in your portfolio to do so. Some businesses release equity from their portfolio as a deposit for new endeavours, or in some cases to fund the entire project.
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What requirements do you need to satisfy?
No matter what type of finance you use to purchase a care home, lenders will look at similar niche requirements. While, of course, affordability and creditworthiness will be considered, their main focus will be on your potential to operate a profitable and reputable care home.
This means lenders will want to be certain that you meet the following requirements:
Industry experience
Most lenders will expect you to have at least two to three years experience of operating a care home, either as an owner or within a senior management position. It’s likely that you’ll need to provide evidence of relevant qualifications to support both yourself and your intended management staff. This would usually be an absolute minimum of NVQ level 4 in Care.
Success and reputation
If you plan to purchase an existing care home, lenders will want to see records of operation for at least two years of trading, and a minimum CQC (Care Quality Commission) rating of good.
Minimum occupancy rates
Some lenders will express minimum occupancy rates in order to lend on a care home. For example, some require a minimum occupancy rate of up to 90% over a set period. Lenders may also require the facility itself to have a minimum occupancy potential. For example, a minimum of 26 beds within the facility is a standard requirement, but some lenders may require a higher number.
Regulatory compliance
As a highly regulated industry, you’ll need to prove that your business credentials are up to scratch when it comes to health and safety, qualifications, required insurance policies and CQC ratings. Ensure that all documentation and certification is available on application.
Business plan
Most lenders will expect you to provide a detailed business plan covering financial projections, expected occupancy rates and a robust marketing strategy. If you’re taking over an existing business, you’ll need to provide records of their previous operations and show how you will maintain or improve upon current performance.
Deposit
The size of deposit required will depend on the type of funding you apply for, but you’re likely to need between 20% and 40% of the property value for this type of commercial endeavour. Existing assets can often be used in lieu of a cash deposit, although the type of asset acceptable will depend on the individual lender.
As with any type of property finance, the greater the risk to the lender, the higher the deposit requirement is likely to be. Those with an outstanding CQC rating will likely qualify for a higher LTV than those with a good rating, for example.
Who are the main care home mortgage lenders and what are typical rates?
An increasing number of high street mortgage lenders are beginning to accept care home applications for commercial mortgages, with the likes of HSBC and Barclays sometimes accommodating this type of loan.
However, most finance in this niche will be offered by smaller banks and specialist lenders, some of whom operate exclusively in the financing of care facilities. Some examples of such lenders are:
1. Atom Bank - Will consider applicants with fewer than two years experience if they meet the following criteria:
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CQC rating of good or outstanding
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70% LTV maximum
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Care home manager must be NVQ4 with at least 2 years experience
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90% occupancy was achieved over the last 6 months
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Can offer a personal guarantee of at least 10% and qualify for a 145% stress test
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2. Allica Bank - can offer commercial mortgages for the purpose of care home purchases from £500,000 to £10m for experienced operators, as well as potentially up to £5m for first-time care home operators that meet the required criteria
3. Triodos Bank - Provides care home finance of up to £20 million and 70% LTV
4. OakNorth - specialises in care homes and provides loans on a bespoke basis
Usually this type of lender is only accessible through a mortgage broker, like ourselves, so get in touch with us to find out what your options are.
Apply for a care home mortgage today
Before you get started with your application for a care home mortgage, it’s a good idea to speak to a broker who specialises in this area. As these deals are usually bespoke, having an expert in your corner often means you can negotiate a better rate.
Our commercial mortgage advisers have deep working relationships with care home finance providers and help you find the best solution for your needs. Get started here to take advantage of a free, no-obligation chat with your adviser today.
FAQs
It is likely to be much more difficult to get approval for a care home mortgage without any relevant industry experience. However, if you’re looking to move into the care industry, experience from a very similar industry may be considered.
It’s a good idea to employ a management team with strong experience and credentials in this field in order to qualify for finance, but be prepared to pay higher interest rates and potentially need a larger deposit in this instance.