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Commercial Mortgage

Commercial Mortgage Rates Guide 2022

A commercial mortgage is a mortgage taken out on a property that is to be used for commercial purposes and not personal or residential. Commercial purposes include businesses, corporations, partnerships, etc. In commercial mortgages, the commercial property serves as collateral for the duration of the loan. The loan is paid back over an agreed period in installments.

Acquiring and paying off commercial mortgages can require a slightly more complicated process than traditional mortgages. Commercial mortgages also come with a different set of risks than traditional mortgages. That is why a comprehensive understanding of commercial mortgages is important before applying for one.

Features of Commercial Mortgages

There are several types of commercial mortgages that a business can apply for, depending on the mortgage lender, down payment, and many other factors. Across all types of commercial mortgages, some critical features remain relevant. These include:

Interest Rates

These can be fixed, variable, or combined. Interest rates are usually presented as a percentage of the initial loan price.

Mortgage Term

Also known as the amortization period, this refers to the amount of time stipulated for the loan to be paid back. An average commercial mortgage can have an amortization period of 1-25 years.

Loan-to-Value Ratio

This is a percentage that shows the ratio of the loan amount to the market value of the property being mortgaged. Lenders use this value as a determiner for the amount of risk they would be taking on by approving a loan.

Differences Between Commercial and Residential Mortgages

Residential mortgages are the more popular type of loan among the two. Customers familiar with residential loans may feel like there is little to no difference between residential and commercial mortgages but this is not true. Some key differences include:

Down Payment

On average, commercial mortgages often require larger down payments than residential. Where a residential property loan may require a down payment of up to 25%, industrial properties may require up to a 35% down payment.

Requirements

The requirements for residential loans include personal income, expenses, and credit scores. For commercial loans, the requirements are more specific and may be determined by the property that is being mortgaged.

Interest Rates

Most commercial mortgages require higher interest rates as commercial properties often have higher values than residential ones. This incurs more risk for the lender. The interest rate may also increase due to the revenue being made by the business or its credit score.

Cost

Besides the down payment and interest rates, commercial mortgages cost more than residential due to processing costs. These processing costs are higher because commercial mortgages require more paperwork and time, documents like environmental reports and property appraisals cost more.

Time

Commercial mortgages typically require longer processing times than residential mortgages. Where a residential mortgage can take as little as four weeks to be approved and closed, a commercial mortgage could take anywhere from a month to a year.

Requirements for Commercial Mortgages

There are certain criteria that a business must pass before being approved for a commercial mortgage. Some of these requirements are explained below.

Business Profitability

The business that is applying for the loan must present a feasible and profitable business plan for its operations. A business that does not seem profitable is not likely to be considered for a mortgage. Lenders have to ensure that the business will make enough income to cover pay back the loan.

Debt Service Coverage Ratio

The DSCR is a figure that determines how much of a given income is available for the payment of debts. Lenders use this figure to ensure that borrowers always have enough income to pay off their loans.

Credit History

Lenders also take note of the credit history of a business when considering it for a loan. Good credit history is a requirement for a commercial loan. The business must have little to no unpaid debt as well. In some cases, the business owner’s personal credit score may also come into play.

Income History

When applying for a commercial loan, lenders require that a business have proof of consistent liquid profit and not equity. The lender may even require that your business have a certain minimum net worth.

Application Process for a Commercial Mortgage

Different lenders may have varying procedures for applying for commercial loans, but most systems should follow these steps.

Analyzing your Finances

Before you can approach any lender, you must take a good review of your business finances to ensure that it is all up to standard. This includes analyzing the profitability of your business, projected growth and revenue, and other factors.

Ascertain your Financial Needs

Proper preparation for a commercial loan application involves finding out what other financial factors may come into play with your loan. This involves answering questions that pertain to the financial running of your business. Such questions include whether the property is to be leased, probable expansion plans, maintenance or renovation budgets, and recurring costs for the running of the property.

Acquire Necessary Documents

When approaching a mortgage lender, certain documents are required of you. It is important to have all of these documents in order. They include:

  • A feasible and detailed business plan
  • Updated financial records for the business
  • Information on the management staff of the business
  • Details on the commercial property to be purchased.

Discuss with Your Lender

Once all of your documentation is ready, the next step is to talk to your lender. Your goal should be to prove to them that you can handle the cost of paying back the loan. Before you bid on a property, you should get the go-ahead from your lender. This involves discussions on the type of commercial mortgage that best suits your business, any other documentation you may need, and more.

Bid on the Property

With the go-ahead from your lender, you can now make a bid on the property of your choice. This is not a decision that should be made lightly so it is important to take as much time as necessary before making an offer on a property. The offer should be made with at least two months to spare before you need to use the property. It gives the lenders time to finalize the loan.

Conclusion

Commercial mortgages are very common, but, because of how much they differ from traditional mortgages, the application process may cause some confusion. It is essential to fully understand all the aspects of a commercial loan before applying for one. This helps to ensure that you get the best property and mortgage deal for your business.

Visit Best Mortgage Online for any type of Mortgage loan and our experts will help you.

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New Purchase Mortgage

Best Commercial Mortgage Rates You Can Find in Canada

When it comes to getting housing units in Canada, the most sought-after option is a house mortgage from the bank or mortgage broker. You can get a mortgage to finance your residential home and commercial property.

A commercial mortgage is similar to what you have for a residential mortgage; the only difference is that this mortgage is taken for non-residential buildings commonly referred to as commercial property. Commercial property covers many facilities that cannot be financed under the residential mortgage plan.

Commercial mortgage rates are determined by the type of properties and their use. There is no fixed rate for a commercial mortgage as it differs for different properties and the mortgage company involved. In this article, Best Mortgage Online will provide you with the right information about the best commercial mortgage rates you can find in Canada.

Commercial Mortgage vs. Residential Mortgage

As introduced above, the type of property involved sets the major difference between a residential and commercial mortgage. While the residential property is usually sought after by regular home buyers or small real estate investors, commercial property is normally meant for real estate investment corporations, partnerships or limited companies.

The commercial property is usually used for business purposes against homes solely used for residential purposes. As you might have imagined, the rates set for a commercial mortgage are typically higher than a residential mortgage, as well as the repayment conditions. However, the repayment period is usually longer than those allowed for a residential mortgage.

In the case of residential mortgage, qualification is usually based on credit scores, personal income etc. But, for a commercial mortgage, the property you are taking out a mortgage for usually serves as collateral till the loan is paid back. It also requires you to have a higher down payment than residential properties. The down payment for commercial property can be as high as 25 – 35% of the cost.

What Counts as Commercial Property?

To be clear about how rates for commercial mortgages are calculated, it is necessary to differentiate between what type of property qualifies for a commercial mortgage and how it is different from a residential one.

Home Loans Canada

The common commercial properties that can be financed in Canada include the following:

  • Multi-Family residential property (5 units and above)
  • Mixed-use properties
  • Office buildings
  • Industrial buildings
  • Warehouses
  • Retail plazas
  • Medical buildings
  • Farmlands
  • Shopping malls
  • Construction projects

These commercial properties under this form of mortgage come with specific Loan-to-Value up to 85% depending on the property type. Properties such as farmlands or vacant spaces can have an LTV as low as 50%. Still, the more functional the property is, the higher the LTV provided by the mortgage company.

Commercial Mortgage Rates in Canada

A commercial mortgage company in Canada can help you get the best mortgage for properties at the lowest rate possible. Asides from this, the process of getting a commercial mortgage might be a bit more complicated with a lot of paperwork. Still, you can easily do this with the assistance of a commercial mortgage company.

When it comes to commercial mortgage rates, there is no one-size-fits-all solution. Instead, the rates depend on the type of property to be financed and the borrower’s financial status. For instance, stable properties connected with borrowers with good credit scores carry better rates than riskier properties with borrowers with not a great credit score.

Commercial mortgages are often based on BBB corporate bonds. Mortgage lenders apply a risk premium to the business loan based on its risk. As a result, riskier borrowers must pay a greater premium, whereas low-risk borrowers’ rates will be closer to a BBB corporate bond yield. On the other hand, these rates are often higher than CMHC-insured commercial rates, which pose the least risk to lenders.

On average, in Canada, the conventional rate for commercial mortgage rate for five years is between 4.3% – 8.3%, while a five-year rate for Canada Mortgage and Housing Corporation (CMHC) is between 3.2% – 5.3%. Additionally, CMHC insures business mortgages against failure. This safeguards mortgage lenders by ensuring that they are compensated if a business borrower fails on the mortgage.

How to Apply for Commercial Mortgage?

Although different mortgage companies have different regulations when applying for a commercial mortgage, there are still basic similarities. For example, the following steps are often required to apply for a commercial mortgage.

  1. Put your business finance in order: One sure thing a potential lender will be looking out for is the viability of your business in terms of profitability and income history. This gives the lender a sense of credibility and the ability to repay the mortgage. Therefore, before applying, you should ensure that your finance is in order.
  2. Determine the type of mortgage you want: Even for commercial mortgages, different service plans are still dependent on the property type. Therefore, before applying for a mortgage, it is best to look at the different plans available and pick the most suitable one for your intended purpose.

Some of the points of consideration include the repayment plan, interest rate, location of the property, production or repair time, and recurring costs like operational fees, legal fees etc.

  • Put together your business documents: Time is of the essence during application for a commercial mortgage as there are most likely other interested parties bidding for the same property. Therefore, it is advantageous to have all the required documents beforehand to beat the competition.

Typical examples of documents required during this stage include; a well-articulated business plan, updated financial statements, details about the commercial property and other useful documents or information about your business.

  • Make an offer: Commercial mortgage is quite a serious investment. It is usually capital intensive and carries a higher risk than a residential mortgage. Therefore, it is best to make an offer with your mortgage company to get the best possible mortgage conditions suitable for your company.

Conclusion

The commercial mortgage requires more capital than a residential mortgage; it is only granted for specific types of properties. It also requires different or additional requirements with varying rates and conditions. The rates on commercial mortgages are generally higher; mortgage companies insured by CMHC have a rate between 3.2% – 5.3% for five years.

For ease of getting a commercial mortgage, it is recommended that you have all your documents – financial statements, business proposals etc. – handy before applying. You should also apply early enough to ensure ample time for proper application review.

At Best Mortgage Online, we can assist you in getting the right information to prepare you for a commercial mortgage. Contact us with the button below.