Commercial mortgages are quite popular with investors in Canada, even though they typically have higher interest rates than residential mortgages. This is because commercial tenancies often last longer than residential options and are easier to manage. Many commercial leases can run up to 10 years, whereas residential leases are typically signed on an annual basis.
Types of Commercial Mortgages
There are several types of commercial mortgages available in Canada with the property being used as collateral, most of them at rates higher than a typical residential loan. For example, a small commercial mortgage may fall between the range of $500,000 up to $2 million. Typical types of properties are convenience stores and auto mechanic shops, as well as small office, retail or combined retail/residential buildings with separate tenants. One of the key factors in obtaining a commercial mortgage is the amount of income the property generates. Another factor is your ability to pay back the loan.
In general, a bigger commercial loan will come with lower interest rates than a smaller mortgage, especially if the property is located in a desirable commercial area. Larger loans are often for properties such as high-rise apartment buildings, industrial land, vacant lots and shopping malls or plazas. Commercial mortgages can take a few weeks or even months to finalize since there are numerous conditions to be met and environmental reports are needed. However, things can move along at a quicker pace if the money is being fronted by a private lender, but the rates may be higher.
The Commercial Mortgage Process
It’s a good idea to be well prepared when applying for a commercial mortgage. It’s recommended that you enlist the aid of a professional mortgage broker to offer valuable assistance and advice. Licensed brokerage firms such as MortgageMeister.com will be glad to work hand in hand with you and take care of all of the legwork. They will explain everything involved with the process and seek out the best terms and rates. Our team will be able to present your financial and income statements to potential lenders to help speed up the application.
Please note, however, that mortgage brokers to do not typically earn a commission for commercial loans, therefore much charge the borrower directly for their services. It’s more often than not still to the borrower’s benefit in enlisting in the aid of a mortgage broker to do so, as a good broker will save you thousands, and potentially even ten’s of thousands, on your interest rate compared to simply just walking into your everyday bank.
It’s important that you have experience in managing a commercial property or have hired somebody who does. Lenders like to know that the property will be well taken care of and will operate as smoothly as possible. Some of the lowest interest rates can be found on mortgages that have been insured by the Canada Mortgage and Housing Corporation (CMHC), as long as there’s enough income to support the loan. In addition, supply and demand will also affect the rates.
Real Estate Investors
Investors should be aware that residential real estate may be financed with a commercial mortgage if the property is regarded as an investment. This pertains to certain residential units as well as properties that are a mix of residential and commercial. The amount of money you can borrow against the property will depend on what type it is, such as multi-family residential, commercial plaza, office, farmland, industrial or a construction project. In general, lenders consider the risk to be greater if the property’s business area is larger in size than the residential area.
Most lenders are interested in the ratio of money you have available and use a loan-to-value ratio system when considering a loan and expect a down payment of typically at least 35 percent. They will also look into your credit history and the current situation of the business. If you’re already operating, the lender will expect the business to be steady and profitable. If you’re not in business yet, they will want to see financial projections and a business plan. It’s important to know that the CMHC won’t insure a property if it’s purely for commercial use, but may ensure a mixed commercial/residential venture.
Since the specifics of a commercial mortgage depend on the property you want to buy and the type of business it will be used for, things can get quite complex. This is why it’s advisable that you visit a mortgage specialist such as MortgageMeister.com to make sure you follow the proper procedures, as well as obtain the best mortgage product available.