Care home mortgages: how lenders size, price and structure them

Not usually. A loan to a limited company or LLP to buy or refinance a care home is commercial lending and sits outside the FCA's mortgage rules. Lending to an individual or to trustees secured on land is a regulated mortgage contract only where at least 40% of that land is used, or intended to be used, as or in connection with a dwelling. A sole trader buying a care home with no house attached is therefore usually outside the regulated regime, but the answer can change where an owner's flat is on the site or the family home is offered as extra security. Lenders and their solicitors check the title, the plans and who lives where before they issue terms.

What if the owner lives in a flat at the care home?

Then the residential share needs measuring. A manager's or owner's flat in a large home is usually a small fraction of the site, but on a small home the flat, its garden and parking can come close to the 40% line. If the borrower is an individual and that line is crossed, the loan becomes a regulated mortgage contract, with different rules on advice and affordability. A loan to a company is not caught by the test, which is one reason operators often hold the property in a company. Smart Funding Solutions arranges unregulated business finance, so we confirm early which side of the line a case falls on.

• Borrower. Loans to companies and LLPs fall outside the regulated mortgage rules.
• 40% test. Applies to individuals and trustees.
• Owner's flat. Counts towards the residential share.
• Extra security. A family home offered alongside can change the answer.

The definition of a regulated mortgage contract is in article 61 of the Regulated Activities Order. Our pages on commercial mortgages and semi-commercial mortgages cover mixed sites. Instant Quotes lists panel lenders for a care home purchase or refinance.

Yes, in principle. Pension schemes that members can direct, such as SIPPs and SSASs, face heavy tax charges if they hold residential property, but the rules exclude a home or other institution providing residential accommodation with personal care for people who need it because of old age, disability, past or present dependence on alcohol or drugs, or past or present mental disorder. A care home building can therefore sit in a pension scheme much as an office or shop can, usually let to the operating company on a commercial lease at a market rent. A registered pension scheme can borrow no more than 50% of the net value of its assets, so a purchase often combines the scheme's own funds with a loan. The scheme administrator and a pensions adviser need to approve the purchase before a lender is approached.

Can a SSAS lend money to my care home company?

Yes, a SSAS can lend to its sponsoring employer if the loan passes five HMRC tests. It must be secured by a first charge on an asset worth at least the loan plus interest, carry interest of at least 1% above the average of six banks' base rates, be repaid within five years in equal yearly instalments of capital and interest, and be no more than 50% of the scheme's net assets. A SIPP has no sponsoring employer, so a loan from a SIPP to the member's own company attracts a tax charge on the member. Because the pension needs a first charge, the asset it takes cannot also be the first charge security behind the main care home mortgage, so both lenders need to know about the loan.

• Holding the property. Allowed, because care homes are not residential property for these rules.
• Scheme borrowing. Up to 50% of net asset value.
• Loan back. SSAS only, to the sponsoring employer.
• Security. A first charge covering the loan plus interest.

HMRC's pensions tax manual explains what counts as residential property for pension schemes. Our pages on buying business premises and care home refinance cover the other routes. Start with Instant Quotes for lenders that fund care home property.

A warehouse is valued on what a tenant would pay to occupy it. A care home is valued as an operating business: the building is specialised, registered for a specific use, and its worth depends on the residents, the staff team and the regulatory standing of the service inside it. If the home closed, the building would be worth far less, perhaps only its value for conversion to another use.

That is why care home lending is a specialist corner of commercial mortgages. A general commercial lender may ask for a vacant possession valuation and lend a small proportion of it. A healthcare lender will lend against the trading valuation, but will underwrite the business as closely as the bricks.

Unlike a simple loan, a care home mortgage usually comes with conditions that are tested throughout its life. Common ones include a minimum level of earnings cover, sometimes a maximum loan-to-value tested on revaluation, a requirement to send quarterly management accounts and occupancy figures, and an obligation to tell the lender promptly about inspections, enforcement or safeguarding concerns. Some facilities treat a serious regulatory downgrade as a trigger for review. Read these clauses before signing: a covenant set too tight can turn a temporary dip in occupancy into a default.

The home is the security, so persistent arrears can end with the lender appointing a receiver. Directors are often asked for personal guarantees, at least for smaller groups. Covenants create risk even when every payment is made. Interest-only portions leave a balance to refinance later, when lending conditions may be tighter. And over-borrowing on a strong valuation leaves no headroom for the next round of wage increases or a fire safety upgrade. A smaller loan with a longer interest-only period is sometimes a better answer than the maximum on offer.