Can I get a commercial mortgage for a warehouse or industrial property?

Yes, it is absolutely possible to secure a commercial mortgage for a warehouse or industrial property in the UK, but these specialist loans are often assessed differently from standard commercial premises based on the property’s use and potential resale value. Borrowers typically need a significant deposit, usually ranging from 25% to 40% of the property value, and should prepare for rigorous due diligence on the business’s financial health.

Can I Get a Commercial Mortgage for a Warehouse or Industrial Property in the UK?

The short answer is yes, specialist commercial financing is widely available for industrial property across the United Kingdom. However, financing a warehouse, factory, or light industrial unit often involves a more complex underwriting process compared to securing finance for standard office spaces or retail shops.

Lenders view industrial property differently due to its unique characteristics, which can affect its market liquidity and value if the business occupying it fails. As an expert finance writer, this guide will walk you through the specifics of obtaining a commercial mortgage for a warehouse or industrial property, detailing the requirements, the application process, and the potential risks involved.

Understanding Industrial Property Finance

Industrial property encompasses a wide range of assets, from large distribution hubs and manufacturing facilities to smaller workshop units. Lenders typically categorise these assets based on their flexibility and potential alternative uses (known as ‘general purpose’ vs ‘special purpose’).

General Purpose vs. Special Purpose Industrial Units

• General Purpose Industrial Units: These are easier to finance. They include standard warehouses, light industrial units, or distribution centres that could be adapted for multiple uses or tenants without significant structural alteration. Lenders view these as less risky because the pool of potential buyers or tenants is larger.
• Special Purpose Industrial Units: These are much harder to finance and may require higher deposits or alternative financing. This category includes properties designed and built specifically for one niche use, such as chemical plants, highly specialised manufacturing facilities, or cold storage units. If the current business fails, adapting the property for a new tenant might be prohibitively expensive, increasing the lender’s risk exposure.

When applying for a commercial mortgage for a warehouse or industrial property, the valuation survey will focus heavily on assessing this marketability and versatility.

Key Requirements for Industrial Commercial Mortgages

To successfully obtain a commercial mortgage for a warehouse, lenders will assess three primary areas: the property itself, the business’s financial viability, and the borrower’s deposit contribution.

1. Deposit and Loan-to-Value (LTV) Ratios

LTV is the ratio between the loan amount and the property’s valuation. For standard residential property, LTVs can reach 90% or 95%. For commercial property, particularly industrial units, the required deposit is significantly higher.

• Typical LTVs: Most lenders cap the LTV for industrial property between 60% and 75%.
• Required Deposit: This means you will typically need a minimum deposit of 25% to 40% of the property purchase price.

The higher the LTV you request (meaning the lower the deposit you provide), the higher the interest rate you are likely to be offered, reflecting the increased risk the lender is taking on. For properties deemed ‘special purpose,’ the required deposit may be pushed closer to 40% or 50%.

2. Business Financial Health (Trading History)

Whether you are buying the warehouse to occupy yourself (owner-occupier mortgage) or to rent out (commercial investment mortgage), the financial health of the business that generates the income is paramount.

• Owner-Occupier: The lender will scrutinise the trading business’s accounts for at least the last three years, looking for consistent profitability and strong cash flow to prove the ability to meet repayments. They will typically look for an Interest Cover Ratio (ICR) that shows the business’s net income is significantly higher than the proposed monthly mortgage payment.
• Commercial Investment (Buy-to-Let): If you are purchasing the warehouse to rent out, the lender will focus on the strength of the lease agreements and the tenants. They need assurance that the rent received will comfortably cover the mortgage payments and associated costs, often requiring a 125% to 150% coverage ratio.

New businesses or startups usually face extreme difficulty in securing standard commercial mortgages and may need to seek alternative, often short-term, finance solutions initially, or provide substantial additional collateral.

3. Borrower Profile and Credit History

As with any major commercial loan, the borrower’s history is thoroughly checked. Lenders will examine your personal and business credit history for evidence of defaults, county court judgements (CCJs), or late payments.

Before making an application, it is highly advisable to review your business and personal credit files to identify and rectify any errors that could negatively affect your application. Understanding your credit position can save significant time and potentially improve the terms offered by lenders.

You can check your credit reports from the three main UK credit reference agencies (Experian, Equifax, and TransUnion) to ensure the information is accurate. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

The Commercial Mortgage Application Process

The process of applying for a commercial mortgage for a warehouse tends to be more intensive and take longer than securing a residential mortgage.

1. Initial Assessment and Agreement in Principle (AIP)

You will typically start by engaging with a specialist commercial finance broker who can navigate the complex market. They will conduct a preliminary assessment of your financials and property needs before approaching suitable lenders. If successful, the lender will issue an AIP, which outlines the terms they are willing to offer, subject to full due diligence.

2. Due Diligence and Valuation

Once the AIP is accepted, the lender commissions a professional commercial valuation survey. This survey is critical; it doesn’t just assess the property’s physical value but also its marketability, environmental risks (common in industrial areas), and its suitability for lending purposes.

The lender will also require extensive documentation:

• Business plans and projections.
• Three years of certified accounts.
• Personal financial statements and evidence of assets/liabilities.
• Details of the lease (if it’s an investment purchase).

3. Legal and Underwriting

The legal process involves solicitors acting for both the borrower and the lender. They will investigate the title deeds, planning permissions, and any potential liabilities associated with the industrial site. Underwriting involves the lender confirming all figures and documents, ensuring all conditions of the loan are met.

The typical timeline for completing a commercial mortgage on a warehouse can range from 8 weeks up to 6 months, depending on the complexity of the property and the efficiency of the legal teams involved.

Interest Rates, Terms, and Repayment Structures

Commercial mortgage rates are generally higher than residential rates because the risk associated with commercial lending is greater. Rates are usually variable (pegged to the Bank of England Base Rate or LIBOR/SONIA replacement indices) or fixed for an initial period (typically 2 to 5 years).

Factors Influencing Interest Rates

• LTV Ratio: Lower LTVs generally attract better rates.
• Business Strength: Highly profitable businesses with stable cash flow secure better terms.
• Property Type: General-purpose industrial units usually receive more favourable rates than specialist properties.
• Term Length: Commercial mortgages typically range from 5 to 25 years. Shorter terms mean higher monthly repayments but lower overall interest paid.

Most commercial mortgages are offered on a capital and interest repayment basis, meaning you pay back part of the borrowed amount plus interest each month. However, some lenders may offer interest-only periods, which can help cash flow initially, but require a plan for repaying the capital balance at the end of the term.

People also asked

What is the minimum turnover required for a commercial mortgage?

There is no specific minimum turnover mandated across all lenders, but most will look for businesses that consistently turn over enough profit to comfortably cover proposed mortgage repayments by a margin of at least 25% to 50% (the Interest Cover Ratio). Trading history, typically three years of audited accounts, is more important than absolute turnover figures alone.

Are interest rates higher for industrial property compared to offices?

Generally, interest rates for industrial property financing may be slightly higher or subject to stricter pricing brackets than prime office or retail space, particularly if the property is highly specialised or located in an area with low market liquidity. Lenders price the loan based on perceived difficulty in selling the asset quickly if the borrower defaults.

Can I use my pension fund to buy a warehouse?

Yes, you can use certain types of registered pension schemes, such as a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS), to purchase commercial property, including warehouses. This is a common and tax-efficient strategy in the UK, provided the property is used for commercial purposes (it cannot be used by the pension holder personally) and the transaction adheres to HMRC rules.

What environmental checks are needed for an industrial mortgage?

Lenders will almost always require environmental surveys (Phase 1 assessment) on industrial land, especially if the site has a history of manufacturing, chemical processing, or waste disposal. The survey assesses the risk of ground contamination, as the cleanup liability can fall to the property owner, potentially wiping out the property’s value. Clean reports are crucial for lending approval.

How long does the commercial mortgage offer last?

A formal commercial mortgage offer typically remains valid for 3 to 6 months. Given the complexity of the legal due diligence on industrial properties, it is vital to work quickly with solicitors to ensure completion occurs before the offer expires, as renegotiating the loan terms after expiry can be costly and time-consuming.

Summary of Key Documentation

To prepare for a swift and effective application for a commercial mortgage for a warehouse or industrial unit, ensure you have the following core documents ready:

• Certified business accounts (3 years).
• Management accounts and current trading figures.
• Detailed business plan and financial projections.
• Personal ID (Passport/Driving Licence) and proof of address.
• Evidence of deposit funds.
• Property details (valuation reports, EPC certificate, floor plans).

Securing a commercial mortgage for a warehouse or industrial property is a specialised financial process that requires access to specific lenders and expertise. By ensuring your business finances are strong, your deposit is adequate, and your credit history is clean, you significantly increase your chances of securing the best possible terms for your industrial property finance needs.