Pub mortgage: finance to buy a freehold pub

A pub mortgage is a commercial mortgage secured on a freehold pub and repaid over a term of years, where the lender looks at both the property and the business trading from it. Unlike a standard commercial mortgage on an office or warehouse, a pub is valued as a trading business. Its worth depends heavily on what it takes over the bar and in the kitchen, so the trade and the operator matter as much as the bricks.

How it works

• Purpose. Buying a freehold pub, buying the freehold of a pub you lease, or refinancing an existing pub loan.
• Valuation. Usually carried out by a valuer with licensed trade experience, who values the pub as a fully equipped trading entity, taking account of turnover, profit and the condition of the building.
• Term and repayment. Terms are often long, with capital and interest repayments; some lenders allow an initial interest-only period while trade is built up.
• Deposit. Expect to contribute a meaningful share of the price from your own resources. Lenders tend to want more equity for pubs than for plain commercial buildings because trading values can move.

A pub mortgage suits an operator with licensed trade experience buying a pub that trades, or will trade, profitably enough to cover the repayments. Typical borrowers include:

• Tenants or leaseholders buying the freehold of the pub they already run, with their own trading figures to show.
• Experienced licensees moving from a tied lease to owning a free house.
• Small pub groups adding another site with a proven management model.
• Hospitality operators buying a pub with rooms or a food-led inn. Our buying a hotel page covers properties where letting bedrooms is the main business.

It is harder for first-time operators with no licensed trade or hospitality management experience, and for closed or failing pubs with no current trade to show. Neither is impossible, but lenders usually want a larger deposit, a strong business plan, experienced staff or a phased approach using short-term funding first. If you are at the planning stage, our guide on how to purchase, fund and open a pub walks through the steps before finance.

Living accommodation

Most pubs include accommodation for the licensee, and lenders generally treat this as part of the commercial operation. If a large share of the building would be your home, or the accommodation is separate enough to be a dwelling in its own right, the loan could fall into regulated territory, which is outside what we arrange. We check this at the outset.

A closed or underperforming pub can be bought with finance, but most lenders will not offer a long-term pub mortgage until the pub is trading again, so the purchase is usually done in two stages. The first stage is short-term funding to buy the site and carry out works, often a bridge or refurbishment facility, sized on the property's value as it stands. The second stage is a refinance onto a pub mortgage once the pub has reopened and built up a trading record, which lenders typically want to see over several months at least.

Lenders on the first stage look closely at the cost and timetable of works, your experience of turning sites around and whether the refinance is realistic. Allow for the time it takes to recruit staff, obtain or vary licences and build a customer base, and keep a working capital buffer for the early months.

Illustration only. This is a hypothetical example with round numbers and no lender committed to it. An experienced operator agrees to buy a closed village pub for £400,000 and budgets £100,000 for a new kitchen and redecoration. A short-term facility funds part of the purchase and works, with the operator's own cash covering the rest. After the pub has traded for a year, the operator applies for a pub mortgage on the strength of the new accounts and repays the short-term loan.

Buying a pub with a mortgage typically takes from several weeks to a few months, depending on the lender, the valuation and the legal work. Indicative terms can come within a few working days in straightforward cases. The specialist valuation and the legal work, including the transfer of the premises licence, stock, fixtures and any staff, are usually the longest stages. If the sale has a tight deadline or comes up at auction, bridging finance followed by a pub mortgage is an option some buyers use.

A pub mortgage is secured by a first legal charge over the freehold pub. Where you buy through a limited company, lenders usually ask for personal guarantees from the directors and may take a debenture over the company's assets, which covers fixtures, equipment and stock as well as the property. Some lenders ask for additional security over other property if the deposit is small. Our guide to debentures and fixed and floating charges explains how this works.

Pub mortgage costs are made up of interest plus several one-off fees, and pricing reflects the strength of the trade and the operator more than the building alone.

• Interest. Fixed or variable, the variable element often linked to Bank of England base rate.
• Arrangement fee. Charged by the lender, often added to the loan.
• Specialist valuation fee. Licensed trade valuations usually cost more than standard commercial ones.
• Legal fees. Yours and the lender's, including licence transfer work.
• Early repayment charges. Common on fixed-rate deals.

Budget separately for stock, any immediate repairs, opening working capital and purchase taxes, which are not covered by the mortgage. Our commercial mortgage calculator helps you model repayments.

The main alternatives are a leasehold purchase, bridging for a quick or distressed acquisition, or a refurbishment facility for a closed site.

• Bar and pub loans: for buying a leasehold, refurbishing or funding working capital.
• Refurbishment finance: to buy and reopen a closed pub before refinancing on its new trade.
• Fit-out and refurbishment finance: for kitchen, bar or bedroom upgrades after you own the pub.
• Hospitality business loans: for wider hospitality funding needs.