A commercial mortgage is a mortgage loan that goes to the owner of a property that is used for revenue generating business activities. This also applies for residences that are legal rental apartments which generate rental income. These properties are typically zoned as “commercial” in Ontario’s land registry database. Commercial property owners usually generate income through rentals or resale.
Several other factors classify these mortgage products with rates higher than their residential counterparts but lower than those for construction loans. These include:
- Longer amortization periods. With the proper CMHC insurance, a commercial mortgage can run for 40 years.
- The addition of property income generation into the qualification criteria. The borrower’s financials are one of the main benchmarks with a commercial mortgage.
Understanding everything you need to know about a commercial mortgage starts with a clear definition of what commercial properties are.
Types of Commercial Properties
There are several types of commercial properties that fit into several different categories. In Ontario, the Municipal Property Assessment Corporation (MPAC), is responsible for commercial and other classifications.
This government agency classifies a property as commercial when it gets used for general commercial uses which include an office, food service, or a retail establishment.
That means it fits into one of these descriptions.
Communications, Office, Medical Offices, and Banks
Included in this category are small and large offices, as well as medical and dental buildings. Multi-type complexes and communication buildings are also included.
Automotive and Repair Services As Well As Grocery, Retail, and Restaurant Outlets
Along with the businesses listed in the title, this classification includes community and regional shopping centres and big-box shopping centres larger than 1000 thousand square feet.
Other classifications include resorts, lodges, and hotels as well as properties used for cultural and resort purposes as well as entertainment and recreation.
Commercial condominiums are another subset. The Ontario government has a full list of these property types. Access it here.
Finding the right classification allows you to proceed and get financing. The classifications can be narrowed down to:
- Residential/ Commercial Mix
- Pure Residential with 1-4 units.
- Pure Residential with 5 or more units.
Approval Criteria For A Commercial Mortgage
You stand a better chance of getting a commercial mortgage when you are prepared. Understanding the criteria before you look for this financing can help your chances of success.
Keep the following points in mind:
- Your personal credit history needs to be good. You’ll more than likely also need to put forward some evidence of your business’s creditworthiness. In Ontario, that means you should have a personal score between 660 to 724. One measurement of a businesses’ creditworthiness is its debt to income ratio.
- The status and type of your business are important. You should be able to show potential lenders that it’s running steady and is profitable. That should include financial projections and a solid business plan.
- The Debt Service Coverage Ratio (DSCR) is another important number. This is the ratio of the required loan payments versus the cash available. Lenders rely on this one and can even apply what’s called an LTV or Loan to Value ratio. You might need to invest some of your own money to keep these numbers balanced.
- Down payments matter too. Commercial mortgages have higher numbers involved. For example, getting a mortgage for mixed property can run between 20% and 35%. A pure commercial property is closer to 50%.
- Insurance is another requirement. However, the Canadian Mortgage and Housing Corporation (CMHC) doesn’t handle pure commercial properties. You stand a better chance of getting this type of insurance with a mixed commercial/residential venture.
The next step is qualifying for a commercial mortgage. Getting the following documents together before you apply will help your chances of success.
How To Qualify For A Commercial Mortgage
Businesses looking to get one of these loans should use a commercial loan broker. They specialise in getting the best loan terms and interest rates for their clients. They also have the experience and skill set to understand all of the financial options available.
- That kind of professional help and the following documents will help you get the money you need:
- An environmental report—phase one is best.
- A recent commercial appraisal from a company that has an AACI designation.
- A quantitative survey if you’re looking for a construction loan.
- A recent copy of the land title.
- A statement of your personal net worth.
- Two years’ worth of financial statements from the guarantor or borrower for the money
- For mixed-use or commercial properties, and an operating statement.
- Personal credit bureaus or commercial counterparts.
- A Tax statement from the municipality.
- In case there are problems with the adjacent land or properties, a real property report.
- A list of all the professionals who will be involved including lawyers, appraisers, realtors, and others.
- Any applicable leases.
- A purchase or sale contract if that’s applicable.
- A building report in case there’s a question about the building’s age.
Finally, a lender might also ask for an existing mortgage statement. Commercial mortgages are different from their residential counterparts. Understanding how is important.
Differences Between Residential and Commercial Mortgages
The mortgages you get for a business/investment venture have stricter requirements.
- The required loan to value (LTV) ratio is more demanding. This is the formula lenders use to determine the amount of money they are willing to provide. The LTV is the highest number on a secured loan based on the market value of the collateral. It’s calculated by dividing the amount of the loan by the asset’s value. Construction loans can go as high as 100% LTV.
- Commercial loans need a higher down payment. For example, a mixed property requires somewhere between 20 and 35%. A pure commercial venture is closer to 50%. Other types of commercial mortgages rates are still higher than residential ones, but lower than construction loans.
Most lenders provide a maximum LTV of 75% with a 25-year commercial mortgage.
Mortgage Broker Store is a team of expert mortgage brokers in Toronto and Ontario. Get in touch with us today to learn more about commercial mortgages. Email email@example.com or call 416-499-2122.