A commercial mortgage in Ontario is a loan secured against a property used for revenue-generating business activities. This includes residences that are legal rental apartments generating rental income. These properties are typically zoned as “commercial” or “mixed-use” 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:
- Shorter amortization periods: Commercial mortgages usually have shorter amortization periods compared to residential mortgages.
- Income generation consideration: The qualification criteria for commercial mortgages include the income generated by the property. The borrower’s financials remain a primary benchmark.
Understanding everything you need to know about commercial mortgage rates in Ontario starts with clearly defining commercial properties.
Types of Commercial Properties
There are various types of commercial properties categorized by the Municipal Property Assessment Corporation (MPAC) in Ontario, which classifies properties, including commercial ones.
A property is classified as commercial when used for general commercial purposes, including office, food service, or retail establishments. Some examples include:
- Offices and Medical Facilities: Small and large offices, medical and dental buildings, multi-type complexes, and communication buildings.
- Retail and Service Outlets: Automotive and repair services, grocery stores, retail shops, restaurants, community and regional shopping centres, and big-box shopping centres larger than 1,000 square feet.
- Lodging and Entertainment: Resorts, lodges, hotels, cultural and resort properties, and entertainment and recreation facilities.
- Commercial Condominiums: A subset of commercial properties.
Finding the right classification is crucial for proceeding with financing. The classifications can be further narrowed down to:
- Residential/Commercial Mix
- Pure Residential with 1-4 units
- Pure Residential with 5 or more units
How to Qualify for a Commercial Mortgage
Businesses seeking one of these loans should use a commercial loan broker. They specialize in getting their clients the best loan terms and interest rates. They also have the experience and skill set to understand the financial options available. Besides, that kind of professional help and the following documents will help you get the money you need:
- Environmental Report (Phase One)
- Commercial Appraisal from a company with an AACI designation
- Quantitative Survey (for construction loans)
- Land Title
- Statement of Personal Net Worth
- Two Years of Financial Statements from the guarantor or borrower
- Operating Statement (for mixed-use or commercial properties)
- Personal and Commercial Credit Reports
- Municipal Tax Statement
- Real Property Report (if there are issues with adjacent properties)
- List of Involved Professionals (lawyers, appraisers, realtors, etc.)
- Applicable Leases
- Purchase or Sale Contract (if applicable)
- Building Report (if the building’s age is in question)
- Existing Mortgage Statement
Approval Criteria for a Commercial Mortgage
When prepared, you stand a better chance of getting a commercial mortgage in Ontario. 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, and you’ll likely also need to put forward some evidence of your business’s creditworthiness. In Ontario, you should have a personal score between 660 and 724. One measurement of a business’s creditworthiness is its debt-to-income ratio.
- The status and type of your business are essential. You should be able to show potential lenders that it’s running steady and 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. The LTV ratio is the percentage of the property’s value owed in mortgages. If a homeowner has a home worth $1,000,000 with a $500,000 first mortgage and is requesting a $250,000 second mortgage, the LTV ratio for the requested mortgage can be 75% of the property’s value. You might need to invest some of your money to balance these numbers.
- Down payments matter. Commercial mortgage rates in Ontario involve higher numbers. For example, getting a mortgage for mixed property can cost between 20% and 35%. A mortgage for 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.
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 loan amount by the asset’s value. Construction loans can go as high as 100% LTV.
- Commercial Mortgages in Ontario require a higher down payment. For example, a mixed property requires between 20 and 35%, while a pure commercial venture requires closer to 50%. Other types of commercial mortgage rates in Ontario are still higher than residential ones but lower than construction loans.
Most lenders provide a maximum LTV of 75% with a 20-year commercial mortgage.