Commercial mortgages are offered to business owners and investors who are looking to purchase or refinance a property that is considered an ‘income producing’ commercial property (shopping center, apartment building, office rental building, warehouses, etc.). Like a residential mortgage, the flexibility of different commercial mortgage plans is also available depending on your financial/business needs. Here is a comparison to residential mortgages to illustrate the similarities and differences:
Similar to Residential Mortgages:
Like a residential mortgage, many aspects of a commercial mortgage, including the process of applying for the mortgage, remain the same. For instance, the loan amount (usually >$1,000,000) is determined using the loan-to-value ratio and debt service ratios. These calculations determine the level of risk or overall comfort of absorbing the risk. The loan-to-value ratio is a simple calculation that breaks down how much (percentage and dollar value) of the investment will be owned by the lender (investor) and how much will be owned by the purchaser. The debt service ratios determine the affordability of the property taking into consideration current debt, income generated (real time/projected), mortgage payments (including all maintenance payments involved), etc. Also, similarly, the loan structure of commercial mortgages can either be in the form of a first mortgage or second mortgage (third mortgages are usually unheard of now). Due to the fact that commercial mortgages pose greater risk, some institutions may not allow second mortgages to be placed on a commercial property. Interest rates on commercial mortgages are higher than residential rates however the rate, like in residential underwriting, is based on an array of factors including credit, income, area, LTV, term (typically 5-10 years in commercial) and more importantly, market interest rates.
Different than Residential Mortgages:
Unlike residential mortgages, the route taken to determine the risk and affordability of a commercial mortgage is slightly different. With a commercial mortgage, the investor is more than likely to assess the business with regards to income generated or projected income. They may want to see a business plan outlining how money is to be made, projected earning vs. expenses, marketing plan or depending on the type of building they may want to see any supporting financial documents to show how much income is being or will be generated per square foot (apartment complex, office suites, etc.). In 2013, the maximum loan to value that an investor was willing to go on a commercial mortgage was 65%. This differs significantly from the usual 80% with residential (not insured by CMHC). Thorough credit assessment has also become an important step in the approval of commercial mortgages as the investors would like to see that the borrower is credit worthy (no late/missed payments, no collections, etc.). Investors are also very picky with the location of the property in which they will be lending. It is important to any investor that the commercial property is in an active resale and rental market area where the property is readily marketable at any time.
It is important to be prepared before applying for a commercial mortgage. It is not unusual for investors to ask for multiple documents that ensure their investment will be safe in property. Having a business plan, financial statements, expense statements, etc. will all help in ensuring your process of obtaining a commercial mortgage is a smooth and successful one. Canadian Mortgage Services is here to provide you with the guidance and expertise you need to achieve your goals.