Commercial Mortgages in Canada
A commercial mortgage is comparable to a residential mortgage. The differences lie in what is used as collateral. A commercial mortgage is secured with business collateral such as commercial instead of residential assets.
Commercial mortgages differ from residential ones in a few different ways.
- They are usually assumed by businesses and not individuals
- The borrower is usually in a business that is incorporated and considered a separate entity from the individual.
- The business applying for the mortgage will be assessed, not the individual.
- It is complicated because checking the creditworthiness of a business is complex.
Why a commercial mortgage loan?
Commercial mortgages applied for when purchasing further property or land for business. There are several reasons why a commercial mortgage loan would be granted.
- New office or location for the business
- For renovations needed on the existing commercial property
- Investments within the business
- Property development
Many of the properties acquired with a commercial mortgage loan are zoned for industrial functions like factories or retail and office related purposes. If payments are not made in a timely manner, the property purchased with the commercial mortgage will be at risk as is the case with residential mortgages.
How to be granted a commercial mortgage loan
Like individuals, companies need to demonstrate creditworthiness in order to be granted a loan. The company’s commercial credit rating will be checked. Just like individuals, companies need to prove that they are able to pay the lender back.
Criteria for company creditworthiness:
- Lenders will check if the company is creditworthy in the long run. If you can prove this and have a good personal credit rating, you will most likely be considered for a commercial mortgage even if the company has an unfavorable credit history.
- If you are willing to invest a personal sum of money into the acquisition of new company property, lenders will be more disposed to secure you a commercial mortgage loan for the rest.
- You will need evidence that your business is secure and lucrative or on its way to being so. Be sure to provide lenders with projections and financial footwork to prove the company’s profitability.
The amount you will be granted as a mortgage loan will be directly correlated to the down payment amount, the loan to value ratio and the value of the property being acquired.
The loan to value ratio is exactly what it sounds like: The amount of the loan versus the value of the property. Lenders can offer up to 90% of the value of the property but it depends on the type of property being purchase, the down payment and the company’s creditworthiness.
Generally, interest rates are higher for commercial mortgages. The interest rate will usually remain fixed, though they are also known to be variable or capped. Terms are generally shorter than residential mortgage loans at three to ten years. Due to the fact that commercial mortgage loans tend to be higher amounts than residential mortgages, the lender will want to receive the principal and the interest back as soon as possible to not run the risk of the cost of the loan exceeding the income made from the interest.