Warehouse Mortgage

A warehouse mortgage is commercial finance used to buy or refinance a warehouse, industrial unit, storage facility, or distribution centre. Lenders assess a warehouse mortgage in one of two ways depending on who is buying: on the trading strength of the business occupying the property, or on the rental income the property produces.

That single distinction determines the valuation method, the affordability test, and the lenders that can consider the case. Getting it right at the outset is what avoids a decline or a repriced offer later.

Mortgage Lane arranges warehouse mortgages for business owners and investors, including cases valued on investment yield or wider commercial assessment. We also place more complex scenarios, including applicants with no accounts, no residential property ownership, or impaired credit, by matching the case to lenders whose criteria fit the borrower and the asset.

Who can get a warehouse mortgage?

There are two categories of warehouse mortgage borrower, and lenders assess each differently.

Owner-occupiers are business owners using the warehouse for their own operations, typically to store goods, materials, or products for distribution. An owner-occupier requires a commercial mortgage. Underwriters base their lending assessment on the occupying business, so affordability is calculated as a multiple of net profit in the latest years' accounts of the operating business.

Investors buy the warehouse to lease to third-party tenants and generate rental income. Lenders assessing an investor case focus on the investment's returns, requiring details of the lease agreements, the rental yield, and the tenant's financial health.

Lenders assess these two borrower types differently, factoring in the purpose of the property, the financial documentation available, and market risk.

Warehouse mortgages for owner-occupiers

Where a business is buying its own warehouse, the lender underwrites the business rather than the property. Four things drive the outcome.

• Company financials. You will usually need company accounts covering the past 2 to 3 years, evidencing profitability and the ability to service the mortgage.
• EBITDA and EBITDAR. Lenders measure financial health using Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA), or in some cases Earnings Before Interest, Taxes, Depreciation, Amortisation and Rent (EBITDAR). These metrics establish whether the business generates enough income to cover the mortgage payments.
• Debt Service Coverage Ratio (DSCR). Most lenders require a minimum Debt Service Coverage Ratio of 1.25x, meaning the business should generate at least 1.25 times the mortgage payment. A DSCR of 1.25x gives the lender headroom for the company to cover both the mortgage and its operational costs.
• Loan to Value (LTV). Lenders typically offer up to 75% of the property value on a warehouse mortgage, requiring a 25% deposit. The maximum LTV varies with the strength of the business and the location of the property.

Warehouse mortgages for investors

Where a warehouse is bought as an investment, the lender underwrites the lease and the tenant rather than the borrower's trading business. Four things drive the outcome.

• Lease agreements. Investors must provide strong lease agreements setting out the rental terms, tenant profile, and rent. A longer lease term is treated more favourably because it secures the income stream, and lenders prefer leases without break clauses.
• Tenant covenant strength. The financial health of the tenant occupying the warehouse is a key factor. A well-established tenant reduces default risk, which improves the terms available.
• Rental income. Lenders assess whether the rental income covers the mortgage payments, typically requiring a Debt Service Coverage Ratio of at least 1.25x. A DSCR of 1.25x means the rental income must be at least 25% higher than the mortgage cost.
• EBITDAR multiples. Lenders sometimes apply a multiple to the property's EBITDAR to calculate borrowing capacity. For warehouse mortgages, that multiple generally ranges from 5x to 8x, depending on the market, the location, and the tenant profile.

Warehouse valuation methods explained

The valuation method a lender applies has a larger effect on the loan available than the headline rate does. Which method applies depends on the borrower's experience, the strength of the lease, and the financial history available.

MV1 (Market Value 1). An MV1 valuation is yield-based, calculating the property's value from the rental income it generates. MV1 is typically used where the warehouse is leased out on strong, long-term leases with solid covenants and established tenants, because the lender is assessing how the warehouse performs as an investment asset.

Bricks and mortar vacant possession (VP). A vacant possession valuation assumes the warehouse is empty and ready for immediate occupation. A VP valuation disregards existing leases and rental income entirely and establishes what the property would fetch on the open market without a tenant. Lenders use vacant possession to confirm the asset retains value if the tenant leaves.

Bricks and mortar 90-day value. A 90-day valuation is the price the property is expected to achieve in a sale completed within 90 days. The 90-day basis focuses on the physical structure and land rather than the income, and is used where the borrower has limited experience, weak lease covenants, or incomplete accounts.

In short: a bricks and mortar valuation focuses on the physical property and is applied where risk is higher or financial history is incomplete. An MV1 valuation is yield-based and is applied to income-generating properties with strong leases.

Other factors affecting warehouse mortgage terms

Loan to Value. Lenders typically offer up to 75% of the property value on a warehouse mortgage. For certain asset types or newer businesses, the maximum LTV may be lower.

Interest rates. Commercial mortgage interest rates are generally higher than residential mortgage rates, reflecting the higher perceived risk. The rate on a warehouse mortgage depends on the loan amount, the borrower's creditworthiness, and market conditions. Investors usually face higher rates than owner-occupiers.

Preparing for a warehouse mortgage application

1. Have your financials ready. Gather company accounts, tax returns, and a business plan before you approach a lender.
2. Use a commercial broker. Rates and terms vary widely between commercial lenders, and the warehouse market is not served by high street products.
3. Consider your long-term needs. Whether you are an investor or an owner-occupier, check the warehouse meets your long-term business or investment goals. Investors should choose a location attractive to tenants with potential for appreciation.
4. Factor in all costs. Beyond the mortgage, budget for the deposit, solicitor fees, surveys, and stamp duty.

Warehouse Mortgage: frequently asked questions