Warehouse mortgage
Warehouse mortgage
;Warehouse mortgages are a type of commercial mortgage designed to finance the purchase or remortgage of warehouses. Whether you’re an owner occupier running a business or an investor seeking to generate rental income, obtaining the right mortgage for a warehouse can significantly impact your financial success. In this comprehensive guide, we’ll delve into the key aspects of warehouse mortgages, explaining how lenders evaluate different borrower types, and provide you with everything you need to know to get the best deal possible for your warehouse mortgage.
"*" indicates required fields
Warehouse mortgage
Warehouse mortgage
';Up to 75% LTV
No experience required
Whole of market
Investment mortgages
Business mortgages
Yield based valuations
We assist borrowers with warehouse mortgage loans to business owners and to investors. Below we will explain how warehouse mortgage lenders will treat owner occupiers different to investors with their underwrite, including affordability and valuation method. Valuations on warehouse properties will also depend on borrower type, but for investors and business owners that qualify, may be able to get a yield based valuation which should be a more generous report for a profitable company. We assist borrowers in the most complex of scenarios, so if you don’t have any accounts, not a home owner or even have bad credit, don’t worry, we can assist you with a suitable avenue.
Key Features
Loan to Value
Up to 75%
Mortgage Term
Up to 40 years
Repayment options
Capital repayment, interest only
Valuation options
Yield based (going concern), vacant possession (VP), bricks and mortar 180-90 day
Experience
Not required
Warehouse Mortgage Loans | Borrower Types
There are two primary categories of borrowers for a warehouse mortgage:
- Owner-Occupiers: These are business owners who plan to use the warehouse for their operations. The warehouse will serve as a critical business asset, often storing goods, materials, or products for distribution. Owner-occupier borrowers will require a commercial mortgage, underwriters will based their lending checks on the business and therefore affordability will be a multiple of net profit in the latest years accounts of the operating business.
- Investors: Investors aim to lease the warehouse to third-party tenants, generating rental income. For these borrowers, lenders focus heavily on the investment’s potential returns, requiring details about the lease agreements, rental yields, and the tenant’s financial health.
Lenders assess both borrower types differently, factoring in the purpose of the property, financial documentation, and market risks.
want to know more?
Mortgages for Owner-Occupiers
If you’re running a business and looking to purchase a warehouse, here’s what you need to know:
What Lenders Consider
- Company Financials: Lenders focus primarily on the strength of the business occupying the warehouse. You will likely need to present company accounts from the past 2-3 years to prove profitability and your ability to service the mortgage.
- EBITDA and EBITDAR: Lenders use Earnings Before Interest, Taxes, Depreciation, Amortisation (EBITDA), or in some cases, Earnings Before Interest, Taxes, Depreciation, Amortisation, and Rent (EBITDAR), as a measure of the business’s financial health. These metrics help assess whether your business generates enough income to cover the mortgage payments.
- Debt Service Coverage Ratio (DSCR): Most lenders require a minimum DSCR of 1.25x, meaning your business should generate at least 1.25 times the mortgage payment. This ensures that your company can comfortably cover the mortgage and operational costs.
- Loan-to-Value (LTV) Ratio: Lenders typically offer financing up to 75% of the property value for a warehouse mortgage, meaning you will need to provide a 25% deposit. However, this ratio can vary depending on the business’s strength and the property’s location.
Mortgages for Investors
For investors, warehouse mortgages are an attractive option due to the growing demand for logistics and industrial space. Here’s what you need to consider as an investor:
What Lenders Look For
- Lease Agreements: Investors must provide strong lease agreements that detail rental terms, tenant profiles, and rent amounts. The longer the lease term, the better, as it guarantees a stable income stream. Lenders prefer leases without break clauses, ensuring tenants remain in place for extended periods.
- Tenant Covenant Strength: A key factor is the financial health of the tenants occupying the warehouse. The stronger the tenant’s financial profile (e.g., a well-established company), the more attractive the mortgage terms may be. A strong tenant reduces the risk of default, making it easier to secure financing.
- Rental Income: Lenders assess whether the rental income is sufficient to cover the mortgage payments. They typically require a DSCR of at least 1.25x, meaning the rental income should be at least 25% higher than the mortgage costs.
- EBITDAR Multiples: Lenders sometimes apply a multiple to the property’s EBITDAR to calculate borrowing capacity. For warehouse mortgages, this multiple generally ranges from 5x to 8x, depending on the market, location, and tenant profile.
Not quite sure what you need?
If you aren’t sure what you need, request a call back from one of our expert mortgage advisors!
-
Under 1 hour response time
-
31 days average offer time
Benefits of Owning Your Warehouse
- Asset Appreciation: Owning your warehouse could be more cost effective in the long term. Once the mortgage is paid off, the warehouse becomes a valuable asset that may appreciate in value.
- Control: As an owner, you have full control over the property, allowing you to customise and adapt the space to suit your business needs without relying on a landlord for consent.
Benefits for Investors
- Capital Growth: Warehouses, especially in prime locations or in high-demand sectors, can appreciate significantly over time, offering both rental yield and capital growth.
- Steady Income: Leasing out warehouse space provides a reliable income stream, especially with long-term, financially secure tenants.
Other Important Factors
Regardless of whether you are an owner-occupier or an investor, several key factors affect the terms of a warehouse mortgage:
Loan-to-Value (LTV) Ratio
The LTV ratio is critical in determining how much financing you can secure. Lenders typically offer up to 75% of the property value. For certain asset types or newer businesses, the maximum LTV could be lower.
Interest Rates
Commercial mortgage interest rates are often higher than residential mortgage rates due to the higher perceived risk. Interest rates on warehouse mortgages typically depend on factors like the loan amount, the borrower’s creditworthiness, and market conditions. Investors usually face higher rates compared to owner-occupiers.
Understanding Valuations
When applying for a warehouse mortgage, lenders may use different valuation methods based on the borrower’s experience, lease strength, and financial history. Here are the key valuation options:
MV1 Valuation (Market Value 1)
This method is typically used when the property is leased out, especially when it has strong, long-term leases. The MV1 valuation is yield-based, meaning it calculates the property’s value based on the rental income it generates. Lenders are interested in how the warehouse performs as an investment asset, making it a popular choice for properties with solid covenants within lease agreements and established tenants.
Bricks and Mortar Vacant Possession (VP) Valuation
The Vacant Possession (VP) value is also based on the physical property but assumes the warehouse is empty and ready for immediate occupation. This approach disregards any existing leases or rental income and focuses on what the property is worth if it were sold on the open market without a tenant. For lenders, this provides a clear view of the base value of the property, ensuring that even if a tenant leaves, the asset retains inherent value. It’s another conservative measure that reflects the property’s worth without the complexities of tenancy.
Bricks and Mortar Valuation (90-Day Value)
This is often used for applications where the borrower may have limited experience, weak lease covenants, or incomplete financial accounts. The 90-day value represents the price the property is expected to fetch in a quick sale. It focuses primarily on the physical structure and land, not the income it generates. This valuation method is ideal for riskier applications and provides a safety net for lenders by offering a conservative estimate of the property’s value.
Key Differences Between Valuation Methods
- Bricks and Mortar: Focuses on the physical property, used when there’s higher risk or incomplete financial history.
- MV1: Yield-based, used for income-generating properties or with strong leases.
QUESTIONS ON WAREHOUSE MORTGAGES
A warehouse mortgage is a type of commercial financing used to purchase or refinance warehouse properties. These loans are tailored to industrial spaces, storage units, or distribution centres and are based on the property’s value, lease agreements, and income potential.
The LTV for warehouse mortgages typically ranges from 60% to 75%. This means the borrower needs a deposit of 25%-40% of the property’s value, though this can vary based on the property’s risk profile and the borrower’s financial standing.
Bricks and Mortar focuses on the physical property’s value, often for quick sales or riskier cases. MV1 uses rental income to assess the property’s value, ideal for properties with strong lease agreements and stable tenants.
Yes, but lenders may impose stricter terms, such as a lower LTV. Bricks and Mortar valuations may also be used for inexperienced applicants due to the higher perceived risk.
A VP valuation assumes the warehouse is unoccupied and doesn’t account for rental income. This conservative valuation focuses purely on the building’s physical value if it were sold without tenants.
Warehouses used for storage, logistics, distribution centres, or manufacturing qualify. The property can either be an investment (leased out) or owner-occupied by a business.
An exit strategy is how the borrower plans to repay the mortgage, either by selling the property, refinancing with a longer-term loan, or generating income through lease agreements.
A strong lease covenant with long-term, financially stable tenants may result in better loan terms, such as higher valuations and loan size. A weak covenant could have the opposite effect.
Typically, you’ll need property details, lease agreements (if applicable), company accounts (for owner-occupiers), a business plan, and proof of income. The exact documentation depends on whether you’re an investor or owner-occupier.
Warehouse properties are in high demand, especially with the expansion of e-commerce and online retail. This has led to warehouses becoming valuable assets, often appreciating in value over time due to demand. For businesses that require significant storage space for goods or materials, buying a warehouse can offer long-term financial stability compared to leasing. On the other hand, investors can benefit from steady rental income streams by leasing out the space. However, securing financing for a warehouse requires understanding how these commercial mortgages work and how lenders assess lending decisions.
Both investors and owner-occupiers can apply for warehouse mortgages. Investors lease out the property, while owner-occupiers use the warehouse for their business operations.
The most common valuations are Bricks and Mortar (90-Day Value), Bricks and Mortar Vacant Possession (VP), MV1 (yield-based valuations), and accounts-based valuations for operating businesses. These vary based on the borrower’s experience, lease agreements, and financials.
A weak lease covenant indicates higher risk, which could lower the loan amount or require a more conservative valuation like the Bricks and Mortar 90-Day Value to safeguard the lender.
Warehouse mortgages often involve larger spaces with more complex uses, such as distribution and storage. The valuation methods and loan structures may differ, focusing on the industrial nature and income generation of the property.
Yes, though it may be more challenging. In such cases, lenders may rely on Bricks and Mortar valuations and require higher deposits or offer lower loan amounts to mitigate their risk.
Interest rates for warehouse mortgages vary based on market conditions, the borrower’s creditworthiness, lease strength, and the loan’s LTV. Generally, around 6%.
A yield-based valuation (MV1) assesses the property’s value based on the rental income it generates. This is typically used for leased warehouses with strong tenants, offering insight into the long-term returns of the property.
Yes, but lenders may use a Vacant Possession valuation, and you’ll likely need a higher deposit and a way to demonstrate affordability. The loan terms may be stricter compared to a property with tenants.
A 90-day valuation estimates the property’s sale price if it were sold within a 90-day period. It’s a conservative valuation method, often used when the borrower has less experience or financial uncertainty.
At Mortgage Lane, we specialise in warehouse mortgages and understand the complexities of industrial properties. We work with lenders to find tailored solutions, whether you’re a first-time buyer or a seasoned investor, and guide you through the best valuation and financing options to secure the most favourable terms.