Hotel refinance: replacing debt and releasing equity from your hotel

Hotel refinance is a new secured loan on a hotel you already own that repays your existing lender, and can also release additional capital from the equity in the building. The new lender takes a charge over the hotel in place of the old one. Because a hotel is valued as a trading business, the amount you can borrow depends on the hotel's profits and trading record as well as its bricks and mortar.

Common reasons owners refinance

• A facility is ending. A bank term loan is reaching maturity, or a review is due and the existing lender's appetite has changed.
• Moving off a bridge. A hotel bought or refurbished with short-term finance is now trading and ready for a longer-term loan.
• Funding improvements. Releasing equity to add bedrooms, upgrade rooms, build a spa or function space, or meet energy efficiency standards.
• Buying out a partner. Raising capital to buy a co-owner's or family member's share.
• Simplifying debt. Combining a mortgage, equipment finance and short-term loans into a single facility with one repayment.
• Changing the repayment profile. Moving to a longer term or a different balance of capital and interest to suit seasonal cash flow.

Hotel refinance suits owner-operators and hospitality groups whose hotel trades profitably and has enough equity to support the new loan. It works well for country house hotels, town centre hotels, coastal and seasonal properties, inns with rooms and larger bed and breakfast and guesthouse businesses, as well as venues where weddings or events form part of the income.

It is harder when trading has fallen sharply and not yet recovered, when the building needs significant capital spending that the new loan would not cover, or when the existing debt is already close to the hotel's value. In those situations a short-term facility, a partial refinance, or work on trading before applying can be more realistic, and we will tell you if that is the case.

The best preparation is clean, current figures and an early start, ideally six months or more before an existing facility ends.

• Bring management accounts up to date and reconcile them with your booking system reports.
• Separate one-off costs, such as storm damage or a closed wing, so underwriters can see underlying profit.
• Request a redemption statement and check for early repayment or hedging break costs.
• List planned capital spending with rough costs, even if you are not raising funds for it now.

Hotel refinance typically takes from several weeks to a few months from first approach to completion, depending on the lender, the valuation and the complexity of the existing borrowing. Indicative terms can come within a few working days in straightforward cases. The specialist valuation and the legal work to release the old lender's security are usually the longest stages. Start well before an existing facility expires; refinancing against a deadline narrows your options and can mean paying for a short extension.

Hotel refinance is normally secured by a first legal charge over the hotel, often with a debenture over the trading company, which covers fixtures, equipment and other business assets. Lenders commonly ask for personal guarantees from directors, particularly for owner-managed hotels. Where the hotel is held in one company and operated by another, both may need to be party to the security. Read our guide to debentures and fixed and floating charges before agreeing terms.

The cost of refinancing a hotel includes interest and fees on the new loan and any charges for leaving the old one, so the true saving or cost has to be worked out across both.

• Interest. Fixed or variable; variable pricing is often a margin over Bank of England base rate.
• Arrangement fee. Charged by the new lender, often added to the loan.
• Valuation and legal fees. Hospitality valuations tend to cost more than standard commercial reports.
• Exit costs on the old loan. Early repayment charges on fixed-rate loans, and break costs if you have an interest rate hedge with your current lender.
• Ongoing conditions. Larger facilities may carry financial covenants and annual review fees.

We set the full cost of moving against what you would pay to stay, so you can see whether a refinance is worth doing. You can model repayments with our commercial mortgage calculator.

The main alternatives are a second charge or business loan for smaller amounts, asset finance for equipment, or short-term finance while trading recovers.

• Fit-out and refurbishment finance: to fund upgrades without replacing your main loan.
• Refinancing business loans: to restructure unsecured or short-term borrowing alongside the mortgage.
• Bridging finance: as a stop-gap when an existing facility is ending and trading is still recovering.
• Mezzanine finance: for larger projects where senior debt alone does not reach the amount needed.