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Commercial mortgages and loans for care homes

Looking to purchase or refinance a care home? Andy Elley, Head of Commercial, looks at the funding options available including the rates you can expect to receive...

With the UK population expected to reach over 74 million by 2039 and with 18% of the population now aged 65 and over (ONS, 2017), it is no surprise that the care sector is becoming a very attractive market from both a business and investment perspective.

Trading businesses operating in the care sector have seen significant uplift in value over the past three years and are now typically being valued at between six and ten times their adjusted net profits. Profitability of care homes tends to range between 23% and 35% of the turnover (depending on how they are run – of course!).

Experience is crucial

In this sector, if you are looking for a mortgage to purchase and run a care home then experience is absolutely key. Most lenders will only fund experienced, established operators with a minimum of 2-3 years proven track record in the industry.

This doesn’t mean that there aren’t options for investors looking to make their first care home purchase but you must have specific industry-related experience under your belt. This applies whether you are looking to run the care home yourself, or put managers in to run the establishment for you. Lenders will also be keen to see you have a registered management qualification, for example NVQ 4. If you don’t have the management qualifications then asking the existing manager of the care home to join your team may be an option, although this will mean putting them on your mortgage application.

It is worth bearing in mind that the Care Quality Commission (CQC) will also interview new entrants to the market and pass them through their application process. Criminal Record Bureau checks are also taken and clear searches are a prerequisite.

If you want to fund the purchase of a care home that is no longer trading and you plan to refurbish or even redevelop it, then a bridging loan will most likely be your only option in the first instance. Whilst it is often easier to secure short term finance, the lender will want to fully understand your exit strategy and will most likely insist that you have both development and care home experience.

Scrutinising the trading accounts

As expected, any lender will want to scrutinise both the CQC report and the trading accounts of the care home to ensure that it is suitable and that the loan can be serviced. Whether purchasing a lease or a freehold you will need to provide the latest three years’ annual trading accounts. Lenders will then assess affordability based on the financials and typically lend up to 5-6 times the adjusted net profits after taking into account your personal drawing requirements.

What sort of care home should you buy?

Freehold care home: The purchase or refinance of an established, successfully trading care home in a desirable location is preferable to lenders. Most lenders prefer a care home that has more than 20 bedrooms. The maximum loan to value you can achieve on a smaller care homes will be less than on one with 20+ beds.

Leasehold care home: When purchasing the leasehold, lenders typically require supporting, tangible security, i.e your home or other property you may own. In the absence of this, some lenders may provide an Enterprise Finance Guarantee loan which means you get the backing of the Government. Bear in mind that the loan term offered to you is unlikely to exceed the length of the remaining lease.

Mortgage rates for care homes

Expect to receive:

  • Rates staring from around 2.1% above Bank Rate
  • Lender arrangement fees from 0% - 2% of the loan amount
  • Most lenders will look at a maximum term of 15 – 25 years capital and interest (for 25 years for borrowers with a strong track record in the industry and large deposit). Interest only terms tend to available on a 6–12 month basis.
  • The loan to value achievable varies significantly, generally between 55% and 70%. If supporting security is provided, banks may lend more than 70%. 

Mortgage application processing times for care homes

Application processing times vary, ranging between three and seven months. If this is your first purchase you could be looking at nearer the seven-month end of the scale, as you will need to allow for a CQC application and interview.

How to apply for a loan to buy or re-mortgage a care home

To get the ball rolling we will need:

  • The latest 2-3 years’ accounts for the care home you are looking to finance
  • If you are an experienced, multi-site operator – last three years account for your main care home
  • An overview of your background and experience (CV if available)
  • Copies of your latest six months’ personal and business bank statements
  • A schedule of your assets and liabilities
  • Proof of your identity and address
  • Sales particulars for the business, e.g. management information from last trading accounts to date.
  • Occupancy schedule for the home
  • Last two CQC reports – showing no major issues with the home

I have been helping clients get care home funding for more than 15 years and previously, I worked for a business agent that sold care homes, so I really do know my stuff when it comes to this! I have a handle on what works and what doesn’t work and I have access to some super deals, so if you want to talk through the options I can be contacted directly on 01732 471644 or andye@mortgagesforbusiness.co.uk. Alternatively, you can call the main line on 0345 345 6788 and ask for the Commercial Desk.

Author

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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