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Everything You Need to Know and More About Commercial Mortgages

Commercial MortgageCanada boasts a thriving economy and great potential for businesses to enjoy financial success. The commercial real estate industry is booming. In fact, total investment in building construction was more than $15.2 billion in the past year.

The idea of multiple streams of passive income is very intriguing to the average Canadian. One of the most lucrative paths to achieve this goal is through real estate investment. Namely investing in business property.

However, the idea of a commercial mortgage can seem intimidating to many people. They may not be aware of other options for obtaining income-producing real estate than just a storefront.

Generally speaking, a commercial mortgage in Canada applies to physical business investment. This property generates income in some way. This could be a multi-unit residential building, industrial property, or office space.

There are a variety of options for commercial real estate purchases, with many benefits to investors. Plus, with such an active market, there is no better time to dive into this industry.

But, there are a few things to consider before taking on a business loan of this type. For more information, or if you’re wondering how to qualify for a commercial mortgage, keep reading!

Commercial Mortgage 101

A commercial mortgage in Canada is similar in some ways to a mortgage for a residential property. There are a few key differences business owners must understand before taking out a loan.

The biggest difference between the two is in the collateral used to secure the mortgage. In a residential mortgage situation, the house itself is the collateral.

If the homeowner fails to meet the loan terms, the lender repossesses the house. They sell it to recoup losses.

On the other hand, commercial mortgages use business assets to secure the loan. The loan is taken on by an incorporated business itself, not the individual.

As such, the lender assesses the business for the loan. This makes the notion of creditworthiness more complicated in the commercial mortgage industry.

Changes in the Commercial Real Estate Market

The past years have brought forth a very competitive market. Interest rates in Canada are lower than ever. This means the commercial real estate industry may be more accessible to those who have not yet dipped in.

Moving forward, the market will continue to provide opportunities for growth for commercial investors. While the long-term condition of the market may be unknown, the benefits of investing in commercial real estate are here to stay.

There are various options for investors to get involved. Several factors will influence their available options.

To stay on top of all the changes in the commercial real estate market, it’s best to contact an expert in this field. They can help identify trends in the market to identify the best opportunities for growth.

Consulting with a trusted Canadian mortgage broker can provide more information on the big picture, and how the market might play out over the long term.

Types of Commercial Mortgages

Business owners and investors use commercial mortgages for a variety of business purposes.

This could need extensive development. For example, purchasing an empty plot of land and constructing a new office from the ground-up.

Or, it could make for a smaller-scale operation. This might be completing renovations on the existing property.

Either way, these situations require additional capital secured through a commercial mortgage broker.

Buying Commercial Property

There are various types of properties that fall under the commercial mortgage umbrella. Of course, there are the traditional office buildings or industrial Canadian commercial properties used for business activities.

However, even residential properties can be considered commercial real estate if acquired as investment property.

Commercial Mortgage Refinancing

Even once you already have a commercial mortgage in place, there can almost always be room for improvement. Situations change, and businesses grow.

Refinancing ensures you are keeping the terms of your commercial mortgage as fair to your current situation as possible. This process ensures both your company and property value match their current state.

This is especially important if circumstances have improved significantly since the structure of the original mortgage. Refinancing an existing loan has many benefits to your business and can save serious cash.

Lowering Interest Rates

Refinancing may allow you to achieve a more competitive rate compared to the original commercial lending offer. Lowering interest rates can save thousands over the life of the loan.

Refinancing, in order to lower interest rates, is an especially relevant topic in today’s market. Interest rates are historically low but will inevitably begin to rise again. This means it may be an optimal time to restructure a commercial real estate loan.

Reducing Payments

By refinancing your loan, you can restructure the payment plan. In addition to lowering interest rates, refinancing can extend the term of the mortgage.

This means in combination with lower interest charges, the remaining balance of the loan spreads out over a greater period of time. Thus, the monthly payment can decrease significantly.

Leveraging Growth

Refinancing provides an opportunity to leverage the equity in your business. This can make it easier to scale your business over time.

Refinancing ensures the business is properly appraised for the value it sustains and is projected to reach. Therefore, you can be sure to have a commercial mortgage that matches this growth.

Improving Cash Flow

One of the main reasons business owners look to refinance is to improve their cash flow. By reducing annual debt, more money is available to spend on other areas of the business.

Disbursing Equity

Another major goal of refinancing a commercial mortgage is to take advantage of equity built up in the property. Cashing-out this value can free up capital for various other business needs.

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Commercial Mortgage Requirements

The requirements for commercial mortgage financing may vary between different mortgage loan office locations in Canada. However, there are some general guidelines that remain the same across the board. 

You will need Canada Mortgage and Housing Corporation (CMHC) insurance if your down payment is less than standard. CHMC insurance adds a layer of protection for your lender, in the event you are unable to pay back the loan. 

CMHC also offers various other flexible funding options to increase your options when looking to purchase multi-family commercial properties. It’s important to study up on the terms and conditions given by this government-backed body.

Recently, the CMHC has tightened rules for which buyers could get approved for residential purchases. It’s unclear moving forward how commercial purchase guidelines may change, as well.

Consulting with a Canadian commercial mortgage broker can help identify these changes. They can help you navigate through any applicable changes on the CMHC side. These experts can steer you in the right direction throughout the commercial mortgage process.

The amount awarded in a commercial mortgage will come down to a few main factors. Some of these are simple—like the type of business and the type of property in question. Others can get more complicated, like the credit history of both the business and the owner behind the application. 

Creditworthiness

Overall suitability for a commercial mortgage will depend on the creditworthiness of the business, among other factors. A positive creditworthiness rating demonstrates to the lender that the company is likely to repay the loan.

One of the most important factors in proving creditworthiness is the success of the business overall.

Business Success

Applicants who are successful in securing competitive interest rates are those that can show they are secure and lucrative—or on the path towards this. Projections, forecasts, and other financial planning documents help illustrate this profitability (or potential for profitability) to a commercial mortgage lender.

This information is key, as the debt service coverage ratio is one of the main points lenders will look at when determining suitability for a commercial mortgage. Essentially, this figure looks at the ratio of cash available to cover the given loan payments.

Down Payment

Another critical factor is the value put forth as a down payment. Commercial real estate carries an expectation of a higher down payment as compared to residential real estate.

For a mixed property, this tends to be somewhere between 20 to 35 percent. For properties with solely commercial use, the value is even higher—close to half of the loan’s value. With a higher risk profile, lenders will likely require a higher down payment.

Loan-To-Value Ratio

Also included is the loan-to-value ratio. This compares the amount of the loan to the property’s value. The amount of the loan will vary based on multiple factors.

Some common examples with their maximum loan-to-value ratios include:

  • Storefront with apartments/Mixed units = max 80 percent
  • Multi-family residential (1-4 units) = depends on property
  • Multi-family residential (5+ units) = max 85 percent
  • Commercial plaza = max 75 percent
  • Office = max 75 percent
  • Industrial = max 75 percent
  • Farmland = max 55 percent
 

Overall, a commercial mortgage usually will not exceed 90 percent of the property value.

Commercial Mortgage Interest Rates

This is another area where a commercial mortgage differs from a residential mortgage. The interest rates for acquiring business property tend to be higher than that of a residential property. The length of the loan also tends to be shorter, averaging three to ten years.

The actual rates will vary quite a bit based on some of the aforementioned factors. No two business loan applications will be the same and thus result in very different mortgage loan offers.

Most interest rates, however, have a fixed rate throughout the life of the loan. There are some variable rate or capped rate mortgages, though they are less common.

Bad Credit Commercial Mortgage

Like with other types of financing, it can be difficult to achieve a loan with favorable terms without a solid credit history. Most institutional commercial lenders will want to see a minimum score of 660, among other factors on your credit report, however there are private mortgage financing options available which is solely equity based.

Unfortunately, with banks and institutional lenders, poor personal credit can still affect your business’s ability to secure a commercial mortgage. When looking at the creditworthiness of a company, lenders will also review the credit record of the business owner.

This helps to inform the lender who may be a good (or not so good) choice to handle the loan funds. This is especially important with commercial real estate, as the loan values tend to be higher than a residential mortgage.

Other factors also come into play, including the nature of the business and the overall economy. 

Without stellar credit, you may have a hard time getting approved for a mortgage that works for you. In these cases, it may be better to stay away from large banks and instead turn to a trusted commercial mortgage broker.

They will be experienced in providing alternative options to help secure funding for a commercial real estate purchase.

Commercial Mortgage Lenders

With so much on the line, it’s important to carefully select a commercial mortgage lender.

The process can be confusing for the layperson to understand, and they may feel lost trying to navigate the commercial real estate industry on their own. For example, the closing process can vary greatly from what you may be familiar with in the homebuying procedure.

Commercial properties can take much longer to lose than a typical residential mortgage. There is usually more at stake, with higher costs and more moving parts involved.

This is where it is essential to enlist the services of a seasoned commercial real estate agent. They should be trusted in the community and well-experienced in this area of real estate.

It may be helpful to consider working with a commercial mortgage broker rather than a big bank. They often have more options—especially for those without a great credit history—than the traditional, large financial institutions.

Turning To The Experts

There is so much potential for growth in the commercial real estate industry.

But to begin navigating through this process, help is key. Consider the services of a seasoned Canadian commercial mortgage broker. They can help you go through your mortgage options and find the plan that best fits your needs.

For more information regarding obtaining a commercial mortgage in Canada, contact us today!

Low Interest Rates

BEST COMMERCIAL RATES

We have access to the lowest commercial mortgage rates.

Fast Approval &Amp; Closing

EASY APPROVALS

Easy commercial mortgage approvals for purchasing and refinancing.

Bad Credit Approved

ANY CREDIT HISTORY

Commercial mortgages approved regardless of credit history.

No Income Verification

ALL INCOME TYPES

All income sources considered for commercial mortgages.

Approved On Equity

APPROVED WITH EQUITY

Hassle-free commercial mortgage approvals based on equity.

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Commercial Mortgage Process In Canada

Commercial mortgage lenders approve commercial mortgages based on equity available in the property.

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