Commercial Mortgages In Canada

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A commercial mortgage involves borrowing money to finance a piece of real estate. Unlike a traditional mortgage, in the commercial mortgage, the property should be zoned for commercial use by businesses, like partnerships, limited companies, and corporations.

Generally, the mortgage is taken out against the commercial property. This means, your commercial property acts as collateral until the loan is repaid in full. The borrower pays the loan back in divided instalments over a predetermined period. Since the commercial mortgage approval process and the subsequent payment plan is complicated, expensive and riskier, it is important to learn about it first and then apply.

So, in today’s guide, you will learn everything about commercial mortgages. Let’s first start with its common features.

Commercial Mortgage Features

If you own a business or company in Canada, you can apply for several types of commercial mortgages and each mortgage has different features. The conditions of your particular mortgage can also vary according to your lender’s rules. However, there are some common features that remain the same for most Canadian commercial mortgages. These include:
Interest Rate: The mortgage interest rate is fixed, variable or combined.
Loan-to-Value Ratio (LTV): The loan-to-ratio can be as high as 85%.
Mortgage Term: The term for commercial mortgages ranges from 1 to 25 years.
Amortization Period: Commercial mortgage’s maximum amortization period is 25 years and these are insured for up to 40 years.

What is Commercial Property Exactly?

When applying for a commercial mortgage, you will have to indicate what type of property you are trying to finance. Below are some of the most popular commercial properties in Canada, as well as their LTV ratios:

Industrial = 75%
Multi-Family Residential (1 to 4 units) = depends on the property
Commercial Plaza = 75%
Construction Project = depends on the property
Farmland = 55%
Multi-Family Residential (5 or more units) = 85%
Storefront (with Apartments or Residential Commercial Mixed) = 80%

If you are an aspiring landlord and looking to buy one or more investment properties, there are 3 types of residential properties you can finance with a commercial mortgage:

Pure Residential (1 to 4 units)
Pure Residential (5 or more units)
Residential Commercial Mixed

Let’s delve into the details and find the difference between a commercial mortgage and a residential mortgage.

Commercial Mortgage vs. Residential Mortgages

Similar to residential mortgages, every commercial mortgage comes with its own rates and repayment conditions. In addition to this, every commercial/business lender has a specific way of assessing their potential clients for financing. With that being said, below are several differences between commercial and residential mortgages that you should be aware of before applying.

Requirements

Your personal income, credit score, and outstanding obligations all play a role in your ability to qualify for a home loan. Because approval is depending on the property you intend to buy, specific approval requirements are rarely posted.

Payments in Advance

Most commercial mortgages require a higher down payment than residential mortgages. For multi-family rental, office, or retail premises, for example, a down payment of roughly 25% is required, whereas industrial areas demand closer to 35%. (the lender funds the rest until the loan is paid off).

Rates of Interest

Commercial properties can be significantly more expensive than residential properties, despite their potential high value, and thus pose a greater risk to the lender. As a result, higher interest rates will apply, especially if the company’s business credit score or forecasted revenue is low.

Time to Process

Most commercial mortgages take 6 to 12 weeks to close, whereas certain residential mortgages can take as short as 4 weeks to close (although 90 days is not uncommon).

Costs of Processing

Due to the additional time and paperwork required, commercial mortgages have greater processing costs than residential mortgages. For example, an environmental study could cost $2,000 and a property appraisal could cost $3,000. You might also wish to contact a lawyer or a real estate agent.

Eligibility Requirements For A Commercial Mortgage In Canada

In order to qualify for a commercial mortgage in Canada, you must meet certain criteria.
Because commercial mortgages can have high loan-to-value ratios and risk levels, most lenders will only approve your firm if it meets the following criteria:

Debt Service Coverage Ratio: This is the first item lenders look at because it displays your company’s cash flow versus its loan obligations. They may also require some cash upfront, depending on the size of the mortgage.

Business Type: Businesses that do not appear to be profitable may not be eligible for decent commercial mortgages. When you apply, make sure you have a good business plan to show that your company will be able to pay back the loan.

Business Health: Most commercial lenders want to fund a company that has been earning a consistent liquid (rather than equity) profit for several years. A minimum net worth of $100,000 – $200,000 may be required for your business.

Credit History: Your firm should have a strong credit history and as little outstanding debt as feasible to qualify for a decent commercial mortgage. To ensure that all payments are paid, you may also require a solid personal credit score.

Down Payment: Lenders may want a bigger down payment for commercial properties than they would for residential properties, depending on your risk profile. Mixed-use properties often require 20%–35% down, but pure commercial properties require closer to 50%.

What Is The Process For Obtaining A Commercial Mortgage?

Despite the fact that your lender’s approval requirements may change, you can apply for most commercial mortgages by following these simple steps:

Step 1: Examine your company’s finances

If you already run a business, double-check your books and finances to make sure everything is in order. Keep in mind that most commercial lenders will only lend to companies that are expected to develop in size and profitability. This is especially true for banks, which will often turn down a business with a poor track record of revenue.

Step 2: Decide on the type of financing you require

It’s critical to prepare a precise budget and analyse all costs before applying for a commercial mortgage. Many businesses overlook this issue, and most lenders will refuse to lend to unprepared entrepreneurs. Consider more than the property’s sale price. Don’t forget to think about the following other factors:

Whether you’re going to finance or lease the property
What type of property are you looking for and where should it be located?
How much space does the company require now and in the future?
How much time would be wasted in production as a result of the expansion?
If there are any repairs, upkeep, or improvements that need to be made to the property,
Costs that may repeat in the future (operational fees, legal fees, etc.)

Step 3: Organize Your Business Documents

After you’ve found a commercial property to mortgage, the following step is to obtain and amend any necessary paperwork, such as:

A well-thought-out and feasible company plan

Your most recent financial statements for your company

Information on the business property

Information about your team (particularly your management team)

Step 4: Consult With Your Lender

When you apply for a commercial mortgage, you’re attempting to persuade the lender that your company can handle all loan payments, interest, and fees throughout the course of the loan’s amortisation period. If you’re not completely prepared, it’s a good idea to talk to your lender before bidding on a house so you can talk about items like:

What form of commercial mortgage does your company require?
What are the terms of the lender’s commercial financing?
Whether a title search and/or appraisal is required?
What kind of environmental and building inspections should you get?

Step 5: Make A Proposal

A commercial mortgage is a significant investment that, if not handled properly, can seriously affect your organisation. Take your time to consider your options and prospective mortgage terms, as you may be trapped with them for a long time. There will be no issues or disagreements during the mortgage application procedure this way.

When you’re ready, submit your offer at least 1 or 2 months before you require the commercial property, as this is how long most lenders take to review your documentation and finalise your loan approval.

The Bottom Line

At Lionsgate, we specialize in helping people get the extra cash they need, obtain funding for private mortgages, as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, fill out the form below. Or, You can leave us a message and we will try to connect you with local lenders and sources that best meet your needs.

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