Jamie David, Director of Marketing & Mortgages
A commercial mortgage is a loan taken out on commercial real estate (as opposed to residential) with the property as collateral. The borrower is generally a company or business as opposed to an individual, and the business may be either a partnership, limited company or incorporated. Consequently, assessing credit history is more complicated with this type of mortgage.You can also expect commercial mortgage rates to be significantly higher than residential rates due to the increased risk.
Types of properties
There are a number of properties that can be classified as commercial properties. It is important to identify exactly what type of property you are looking to finance. Residential real estate can be financed under a commercial mortgage if it is purchased as an investment property. This can fall into one of three categories:
- Pure residential, 1-4 units
- Pure residential, 5 or more units
- Residential Commercial Mixed
There are a number of other properties that fall under a commercial mortgage. You would consider a commercial mortgage if you are looking to finance an office, retail or industrial property.
Expected time frame
Residential mortgages usually take around 90 days to close, but could close in as soon as 2 to 3 weeks. On the other hand, commercial mortgages take much longer and could take anywhere from 60 days up to a year to close.
Types of commercial mortgages
|Type||Max Loan-to-Value Ratio|
|Storefront with Apartments/ Residential Commercial (Mixed) Individuals||80%|
|Multi-family residential (1-4 units)||See Investment Property|
|Multi-family residential (5 or more units)||85%|
|Commercial plaza mortgage||75%|
For commercial mortgages, it can be difficult to compare rates as lending criteria are not typically advertised and terms and conditions can differ greatly. It is advisable to procure the services of a mortgage broker. A commercial mortgage broker usually deals with office, industrial, retail and rental apartment properties and can generally connect you to a number of lenders in the required area.
A lender will assess the risk associated with the individual property.
For example, a mixed property could be one with a storefront but with 2- 3 floors of residential property above. The risk of a property increases if the business area of a property is greater than the residential area (in square feet). Commercial properties are generally considered to be riskier, as repayment is dependent on how well the business does.
If you choose to pursue a commercial mortgage, there are specific criteria that you will have to satisfy. The bar is set quite high, as the value of loans is considerably higher.
- Debt service coverage ratio. This is the main criterion that lenders will look at and is essentially the ratio of cash available to the required loan payments. Most lenders will apply a loan-to-value ratio and will expect you to invest some of your own money into the purchase to balance the odds.
- Credit history. Most lenders will require a good personal credit score as well as evidence that your business is creditworthy. There are lenders that may accept applicants with a less-than-perfect credit history, but they are few.
- Current business situation. If your business is up and running, commercial lenders expect your business to be profitable and steady. You may need to provide your business plan and financial projections to ensure that you will be able to make your payments on time. Some lenders may have a minimum net worth requirement of about $100 to $200K. Funds need to be liquid, not in equity, so RRSP, cash, stocks etc.
- Type of business. The terms of a commercial mortgage are dependent on the type of business as well as the property you want to purchase. This can be quite a complex area, so it is advisable to acquire a specialist - either a solicitor or chartered surveyor - to advise you.
- Down payment. A higher down payment is expected of a commercial property. A typical down payment on a mixed property falls between 20-35%. A pure commercial property is typically higher, near 50%. Your risk profile directly determines the down payment that is required of you.
Commercial mortgage insurance
Insurance for a commercial property is more complicated than with a residential property. For instance, CMHC won’t insure a pure commercial property. However, they may insure a mixed residential-commercial property with a down payment as low as 15%. With a personal residential property, the lender can be assured that the borrower will make mortgage payments a priority. However, with a commercial mortgage, it is easier for the borrower to declare bankruptcy if business isn’t going well and default. So, lenders need security in the form of insurance.
Mortgage broker fees
If you use a mortgage broker to help you connect to a lender with a competitive rate, then the broker will charge you, the client, a finder ’s fee. This can fall somewhere in the range of a few thousand dollars. Some of the best commercial mortgages are now offered by private funds such as pension funds, credit unions, mortgage conduits and speciality “niche” lenders.