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Refinancing your care home business: is now a good time and how much can you borrow?

Business News

When it comes to funding for the care sector, there are a multitude of options from debt refinance, new build developments, extensions, property, or business acquisitions (including turnaround) to other transactions like share purchases or management buyouts.

Lenders funding the care sector each have their own set of criteria and differing appetites for lending. These can often change and move around so it helps to speak with a finance professional who works closely with the market. 

Below, we answer your FAQs that are typical of business owners with a portfolio of 1-10 homes.  

Is now a good time to refinance our debt? 

The past twelve months have seen the most turbulent finance markets for more than a decade. We are seeing signs of some welcome stability. This will hopefully lead to a levelling of interest rates, along with improved business and lender confidence.  

So now is certainly a much better time to refinance than it has been for a while. Lenders are taking a positive view of the sector, offering more competitive terms and looking to grow their overall exposure. 

If the question is, ‘should we fix our rate now?’, that is a more difficult question to answer and very much down to your risk appetite. The longer-term fixed rates have come down from the peak, and many owners wish to hedge and lock in as further rapid increases would be crippling to them. 

However, we also see owners taking the view that rates will drop, even if just by a small amount, over the next few years – so they prefer to stay on a variable rate. Variable products have no early redemption charges, allowing clients to lock in later. 

No one can predict rate movements with absolute certainty. The decision to lock in or not needs to be about managing business cash flow and the risk that any potential volatility would being to your specific circumstances. 

Are the high street banks still the best option? 

Over the past decade, the lending climate in the care home sector has changed dramatically. The appetite of the high street banks has heavily receded, with high street lending typically only available to well-established customers with large loan requirements. 

Specialist lenders have moved to fill this gap with flexible loan offerings and aggressive lending criteria. Their pricing has sharpened and is more competitive and comparable to high street banks than it has ever been. 

Specialist lenders (often referred to as challenger banks) generally have faster response times and can underwrite deals quicker than the high street. They also have more flexible lending criteria. For example, they will lend to early-stage businesses, offer higher loan to asset values or higher multiples of earnings. 

Additionally, specialist lenders have the flexibility to offer different loan structures, including interest only, capital and interest, and revolving credit facilities.   

How much can I borrow? 

When a bank lends money, they must complete affordability checks against the business or individual. This ensures the applicant can reasonably afford the debt they are taking. The size of the loan is a function of two calculations:

1) A multiple of profit to assess the business’ ability to service the loan, and 

2) The loan as a percentage of the value of the asset (loan-to-value, or LTV).

Typically, care sector multiples have been strong. The range of multiples from high streets to specialist lenders is broad, ranging from x3 to x7.50 of business profits. Those able to access the higher multiples are typically well-established businesses with robust historical and future profit levels, or larger homes with 60+ bedrooms. 

LTV also has a broad range across different lenders. Typically, we see loan values of 60-65%. It is possible to secure 75% LTV in certain circumstances. 

What rate should I expect to pay? 

There are two factors that make up the borrowing rate. 

The first factor is the base rate. Base rate is currently at 5.25% for a variable rate mortgage. There may be scope to secure a five-year fixed rate at lower than 5.25%, as market expectation is that rates are close to their peak, which is reflected in long-term products.  

The second factor that makes up the borrowing rate is the lender margin. Margins differ between lenders, with the high street banks generally offering the lowest margin. The gap between high streets and specialist lenders has closed in recent years. Many borrowers take the view that the higher leverage and more flexible approach of the specialist lenders is worth the small premium in margin. 

Typically, we see margins from 2% to 4%, depending on the lender and the circumstances of the borrower. Businesses with strong trading history and robust cashflow forecasts can expect to achieve the lowest margins. 

Taking the two rate factors into consideration (base rate, plus lender margin), the total variable borrowing rates range from 7.25% to 9.25%. 

When it comes to care sector funding, our advice is, speak with a broker experienced in the field who will match your personal circumstances with the most appropriate lender and product.

Want to discuss your options? Contact our sector specialists

Richard Jones

Head of Healthcare

Steve Travers

Specialist Healthcare Advisor

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