What is a Commercial Mortgage?
Just as the name suggests, a commercial mortgage is a loan that is taken out on commercial real estate (instead of residential real estate), using the property as collateral.
Unlike residential mortgages which are usually taken out by individuals, the borrowers of a commercial mortgage are usually a company. Partnerships, limited, and incorporated companies can all take out commercial mortgages. Because lending to a company is significantly more risky than lending to an individual, securing financing can be very difficult.
Types of Commercial Mortgages in Vancouver
Commercial mortgages are used to generate capital for a wide range of properties. Below are some of the most common properties that qualify for a commercial mortgage:
- Multi-Residential Properties
- Income Properties
- Bridge Financing
- Industrial Properties
- Office Space
- Raw Land
- Farm Land
- Construction Projects
- Self-Storage Space
- Debt Consolidation
- Mixed Residential/Commercial Properties
Commercial mortgages are typically used to purchase, refinance, or redevelop the types of properties above. Borrowers also have the option of selecting a variable, or fixed interest rate.
How Long Does it Take to Get a Commercial Mortgage in Vancouver?
Getting a commercial mortgage approved can require a lot of specific steps. Because of all the hoops that need to be jumped through, approval for a commercial mortgage in Vancouver can often take up to 6 months. This is quite long compared to a residential mortgage, which can be finalized in a matter of weeks.
Qualifying for a Commercial Mortgage in Vancouver
Lending money to a company is far more risky than lending money to an individually because it is easier for a business to file for bankruptcy if the business is not successful. For this reason, lenders have very strict lending criteria in place.
In order to qualify for a commercial mortgage, you’ll need to be able to satisfy the lender’s requirements in the following areas:
Good Credit is Important for Getting a Commercial Mortgage
The majority of financial institutions will look at your personal credit history to determine if you are a worthy borrower. They will also require proof that the business is creditworthy.
Commercial Mortgage Lenders look at Business Success
If you’re already running a business, the lender is going to expect that operations are smooth, and it is making money. The lender will also likely request your business strategy and upcoming financial projections to help them determine if you will be able to make all of your mortgage payments. It is important to note that some lenders also have a minimum net worth of $100-$200K to qualify.
Type of Business Influences Commercial Loans
Having a successful business isn’t all you need to qualify for a commercial mortgage, it will also depend on the type of business that you run. The type of business you have and the property you want to purchase will influence the terms of your commercial mortgage.
Commercial Mortgage Lenders Calculate Debt Ratio (DSCR)
The business’s debt service coverage ratio is a very important part of the mortgage qualification process. The debt service coverage ratio tells the lender how able the borrower is to pay off the debt based on the their income. An ideal DSCR is greater than 1.
Down Payments are Higher for Commercial Mortgages
Down payments for commercial properties are almost always higher than for residential properties. A commercial property with no residential aspects (mixed property) can often require a down payment of almost 50%. The required down payment will depend on how risky the lender deems you.
Residential vs. Commercial Mortgage Rates in Canada
Commercial mortgage rates are often higher than residential mortgage rates in Canada because of the increased risk to the lender. It is common to see commercial mortgage rates at about 2% higher than residential mortgage rates.
While rates depend on the specific mortgage product, if the fixed rate on a 5-year term on a residential mortgage is around 3%, a commercial mortgage for the same term could be expected to be about 5%.
Because commercial mortgages can be so complex, their specific terms and details are not usually advertised or made publicly available. This makes it extremely difficult to determine which lender has the best product for you. For this reason, it is highly recommended to work with an experienced mortgage broker.
Working with a Commercial Mortgage Broker in Vancouver
Commercial mortgages are very, very complex mortgage products, so it will take some shopping around to find a lender that will be suitable for your specific situation and property. While your local bank branch may offer commercial mortgages, they only offer “their” products. This means that the mortgage they offer you might not be a good fit, and could even end up costing you a lot more money than if you got your mortgage through another lender.
That is where Vancouver Mortgage brokers come in. A mortgage broker routinely works with 40+ lenders, and knows the ins and outs of all their commercial mortgage products. After assessing your unique situation, a mortgage broker will review the mortgage products available across all their lenders, and present you with only the best options to choose from.