Imagine the possibilities: a spacious warehouse for your growing e-commerce business, a state-of-the-art manufacturing facility, or a custom-designed workshop for your artisanal crafts. The truth is, industrial unit mortgages are more accessible than you might think. In this blog we’ll demystify the process, explore the eligibility criteria, and guide you through the steps to turn your industrial property dreams into reality.
Types of Warehouse Mortgages
There are two main types of industrial unit mortgages that UK business owners can look into: owner-occupier mortgages and commercial investment mortgages.
Owner-Occupier Mortgages
An owner-occupier commercial mortgage is designed for businesses that plan to use the industrial unit for their own operations. This type of mortgage allows businesses to buy an industrial unit and make mortgage payments instead of rent. The primary advantage here is that mortgage payments contribute to building equity in the property, making it a valuable asset over time.
Commercial Investment Mortgages
Commercial investment mortgages are suitable for individuals or entities looking to invest in industrial properties to generate rental income. By becoming a commercial landlord, investors can lease out the warehouse space to other businesses and enjoy a steady stream of revenue. This type of mortgage is an attractive option for those looking to diversify their investment portfolio with commercial real estate, which is typically higher yielding.
Eligibility Criteria for Industrial Mortgages
Getting a mortgage for an industrial unit in the UK involves meeting certain minimum benchmarks. These criteria ensure that the bank’s risk is minimized while showing the borrower is capable of fulfilling the mortgage commitment. Here are some common factors considered by lenders:
Financial History
Lenders will take a deep dive into your business’s financial health, scrutinizing your profit and loss statements, balance sheets, and cash flow projections. Demonstrating a solid financial history and consistent revenue streams significantly boosts your odds of securing a mortgage for an industrial unit.
Credit History
Both your business and personal credit histories are crucial in the mortgage approval process. A solid credit score showcases your trustworthiness in repaying debts, which can result in more favorable mortgage terms. Be ready to supply credit reports for your business and any key individuals associated with the application.
Location and Condition of the Industrial Unit
Lenders place significant importance on the location and condition of the industrial unit. Properties situated in prime locations with high demand and robust infrastructure are more likely to secure mortgage approval. Furthermore, the overall condition of the unit, including its structural integrity and energy efficiency, will be carefully evaluated.
Financing a Industrial Unit Purchase
For business owners considering purchasing an industrial unit, understanding the financing options is crucial. Here are some common methods for financing a warehouse purchase:
Commercial Mortgages for Warehouses
A commercial mortgage is a loan specifically designed for purchasing commercial properties. Here are some key points to consider:
Loan-to-Value Ratio (LTV): Lenders usually lend between 60% – 75% of the value of an industrial unit, requiring a deposit of 25% to 40% of the property’s value. This LTV will vary lender by lender, so it’s worth comparing different lender criteria. The lender will conduct a valuation to determine the unit’s value and ensure it meets their lending criteria. In many cases lenders will lend a percentage of the vacant possession value, which is the value of the property without a tenant in place, while others will lend against the higher market value. Be sure to establish this key point at the outset.
Interest Rates: Commercial mortgage interest rates can vary based on the lender, loan amount, and borrower’s creditworthiness. Rates may be fixed or variable.
Repayment Terms: Repayment terms for commercial mortgages can range from 5 to 25 years. Longer terms mean lower monthly payments but higher overall interest costs. With many specialist lenders you’ll be able to make interest-only payments rather than capital and interest. This can help your cashflow by giving lower monthly payments.
As financing the purchase of an industrial unit is relatively specialist getting the support of a commercial finance broker to source the right commercial mortgage can add a lot of value in navigating the process.
It’s also worth considering the energy efficiency of the unit, in part because it can affect your commercial mortgage terms. Aside from the environmental benefit and cost savings, your unit will need to meet or exceed the legal minimum EPC rating for starters. Beyond that many lenders also offer incentives, such as fee discounts or interest reductions, for properties with better EPC ratings. There are various ways you could improve your EPC rating, so of which can be simple and cost-effective.
Applying for an Industrial Unit Mortgage
Applying for an industrial unit mortgage involves several steps, each requiring careful attention to detail. Here is a step-by-step guide to help UK business owners navigate the application process:
1. Preparation
Start by collecting all the required documents, such as financial statements, credit reports, business plans, and property details. Perform a comprehensive review of your business’s financial health to ensure you meet the lender’s standards.
2. Research Banks and Lenders
Not all lenders offer mortgages for industrial units, so it’s essential to research and identify those that do. Consider factors such as interest rates, loan terms, and customer reviews. Talking with a commercial mortgage broker can also provide valuable insights and help you find the best lender for your needs.
3. Submit Application
Submit your commercial mortgage application along with the required documents. Be prepared to answer any questions and provide additional information as requested by the lender.
4. Valuation
The lender will perform a valuation to assess the industrial unit’s value and ensure it meets their lending criteria. This appraisal includes a detailed inspection of the property’s condition, location, and market value. In many cases, lenders will offer loans based on a percentage of the vacant possession value, which is the value of the property without a tenant. Others may lend against the higher market value. It’s crucial to clarify this key point with your lender from the start.
5. Underwriting
During the underwriting process, the lender will thoroughly review your application, financial documents, and property appraisal. This step involves assessing the risk and determining whether to approve the mortgage.
6. Approval and Completion
If your mortgage application is approved, you’ll receive a loan offer outlining the terms and conditions and you’ll proceed to legals. During the legal process you’ll sign the necessary legal documents, and the mortgage funds will be disbursed.
Benefits of Buying an Industrial Unit
Purchasing your industrial unit using a commercial mortgage comes with several benefits for UK business owners. Here are some key advantages:
Asset Ownership
Owning an industrial unit provides businesses with a valuable asset that can grow in value over time. Instead of paying rent to a landlord, mortgage payments contribute to building equity in the property.
Stability and Control
Having your own industrial unit ensures stability and control over your operational needs. You can make the space suit your business needs without worrying about lease expirations or rent increases. You may be able to reconfigure the space in the future to support your growth.
Potential Rental Income
For investors, owning an industrial unit opens up opportunities for earning rental income. Leasing out the warehouse space to other businesses can provide a steady stream of revenue and contribute to long-term financial stability.
Tax Benefits
Mortgage interest payments on commercial properties can often be tax-deductible, providing additional financial benefits for business owners.
Challenges of Securing an Industrial Unit Mortgage
While there are a number of benefits, it’s important to consider the challenges associated with a commercial mortgage:
Financial Commitment
A commercial mortgage represents a big financial commitment. It’s crucial to ensure your business or investment can keep up the monthly mortgage payments, property maintenance costs, and other expenses.
Market Changes
The commercial real estate market can fluctuate over time, impacting property values and rental income. It’s essential to keep up to date on the market and have contingency plans in place to mitigate potential risks.
Regulatory Compliance
Industrial units must comply with various regulations, including planning laws, safety standards, and environmental requirements, including ensuring that the Energy Performance Certificate rating meets or exceeds legal minimums. Staying up-to-date with these regulations and ensuring the property remains compliant can be challenging.
Tips for a Successful Commercial Mortgage Application
To enhance your chances of securing a mortgage on your industrial unit, consider the following tips:
Strengthen Your Financial Profile
Ensure your business finances are in order before applying for a mortgage. Pay down existing debts, improve your business credit score, and maintain accurate financial records. Having filed accounts as well as up to date management accounts to hand is a must.
Work with a Commercial Mortgage Broker
A commercial mortgage broker can help you traverse the complexities of the application process, pinpoint suitable lenders, and negotiate favorable terms on your behalf.
Stay Informed About Market Trends
Keep abreast of market trends and property values in the area where you plan to purchase the unit. Understanding the market landscape can help you make informed decisions and avoid potential pitfalls.