Hotel finance rates and costs

What sets a hotel finance rate

A hotel finance rate is built from a reference rate plus a margin, or quoted as a flat rate per annum or per month. The reference is usually the Bank of England base rate or SONIA, and the margin reflects risk. The lower the loan to value, the stronger and more stable the trading, and the better the operator and tenure, the lower the margin. Hotels are trading businesses, so lenders price the operational risk as well as the property, which is why hotel rates sit above plain commercial property lending.

This is a guide to the cost of borrowing against a hotel as a business. All figures are indicative, vary by lender, and never constitute an offer of credit.

Fixed or variable is the first choice that affects your rate. A fixed rate gives certainty for a set period and protects against rate rises, useful when cash flow is tight or you want predictable budgeting, but it usually starts a little higher and may carry early-repayment charges. A variable rate, set as a margin over the Bank of England base rate or SONIA, moves with the market: cheaper if rates fall, dearer if they rise. Many hotel borrowers split the difference, fixing part of the debt for stability and leaving part variable for flexibility. The right mix depends on your view of rates and how long you intend to hold the hotel.

Indicative rates by product

Each product is priced differently because each carries different risk and runs over a different period. The ranges below are indicative for a reasonable hotel proposition; weaker cases price higher and stronger cases lower.

Bridging is dearer per month because it is short, fast and often used where trading is unproven or the asset is being repositioned. Development finance carries a higher rate because the lender funds a project that is not yet earning.

It helps to read the rates as a risk ladder. A stabilised, freehold, well-traded hotel borrowing at a conservative loan to value sits at the bottom of the ladder and earns the keenest term rate. Move up to a leasehold or unproven hotel and the term margin widens. Step onto short-term money, where the lender is funding speed or a repositioning, and you reach the monthly bridging rates. At the top sits development finance, funding a project with no income at all until it opens. Each rung up reflects more risk to the lender, and you pay for that risk in the rate. Reducing your own risk, through equity, trading evidence and a clear exit, is the surest route to a lower rate.

The fees alongside the rate

The headline rate is only part of the cost. Budget for the fees below, which apply across most hotel facilities. We make the all-in cost transparent before you commit, so you can compare offers on a true basis rather than on the rate alone.

Is a rate around 7 to 10% reasonable

For commercial trading-business lending, a term rate in the high single digits to around 10% is in the normal range, given that the lender is pricing operational risk as well as property risk. Whether a particular rate is good depends on the loan to value, the trading record, the tenure and the term. A strong, branded, freehold hotel with consistent RevPAR will sit at the lower end; a weaker independent or a repositioning project will sit higher. The right comparison is not to a residential mortgage but to other hotel facilities on a similar profile.

How to reduce your cost of finance

• Lower the loan to value with a larger deposit or by phasing capital expenditure
• Evidence strong, stable trading and rising RevPAR before applying
• Bring an experienced operator or management team to the deal
• Choose freehold where possible, or a long, strong lease
• Refinance off bridging or development debt onto a term mortgage once stabilised
• Use an arranger to reach the lender most competitive on your profile

Market conditions also move pricing. As the Bank of England base rate path shifts, term-mortgage margins and bridging rates move with it, so timing and the choice of fixed or variable matter.

How the rate translates into monthly cost

The headline percentage only becomes real when you see it as a monthly figure against the hotel's profit. On a term mortgage, the rate, the term and whether it is interest-only or capital-and-interest all shape the monthly payment, which must be covered comfortably by EBITDARM with headroom. A longer term lowers the monthly cost but increases total interest; a shorter term does the reverse. On bridging and development finance, interest is often rolled up or serviced monthly, and because the rate is monthly rather than annual it adds up quickly, which is why these facilities are kept short and exited promptly.

When we present options we always show the all-in monthly cost and the total cost over the facility, not just the rate, so you can see what a deal really costs to carry. A hotel that comfortably covers its finance cost from trading is a resilient business; one where the cover is thin is exposed to any dip in occupancy or rate, which is the situation lenders and sensible borrowers both want to avoid.

What moves rates over time

Hotel finance rates are not static. The biggest driver is the Bank of England base rate, since most term and variable facilities are priced as a margin over it or over SONIA, so when the base rate rises borrowing costs follow, and when it falls they ease. On top of that, lender appetite shifts with the economic cycle and with how the hospitality sector is trading: in a confident market with strong RevPAR and busy investment volumes, lenders compete and margins tighten, while in a nervous market they widen margins and trim loan to value. The strong reported investment volumes in recent years have supported a competitive lending market for well-presented hotel deals.

Because the backdrop moves, timing and structure matter. Locking a fixed rate ahead of expected rises buys certainty; staying variable ahead of expected falls keeps cost down. Refinancing a development or bridging facility promptly, once the hotel stabilises, swaps an expensive short-term rate for a cheaper term rate. We keep a view on where the market and the base rate are heading so the structure we arrange fits not just today's rate but the likely path of rates over the life of the loan.