Like residential mortgages, a commercial mortgage is money that you borrow in order to purchase a property. While the difference between a residential property and a commercial one might seem small, it actually has a huge impact on the terms of the mortgage.
There are some obvious examples of commercial real estate properties, such as stores, office buildings, and warehouses. But some residential properties can be purchased with a commercial mortgage if the reason for purchasing is commercial in nature – a multi-unit apartment building that you plan to rent out can be considered commercial.
|Types of Commercial Mortgages||Example Property|
|Pure Residential (Investment Properties)||
1 – 4 units, such as a home, duplex, or townhouses
5 or more units, such as an apartment complex or condo building
|Residential Commercial Mixed||
Ground-level storefront with apartments above
Multi-level office space with commercial space on the ground floor
Live/work (business operating on ground floor of residential property)
Commercial mortgage rates are higher than residential rates. The exact rate depends on the type of property being financed.
Commercial mortgages have higher rates than residential mortgages, but they also have higher fees. You can expect to pay thousands of dollars in set up fees, including:
Depending on the lender that finances your mortgage, the lender fee varies. On average, your lender will charge between 4 and 6% of the mortgage amount.
Because commercial mortgages are harder to find financing for than residential mortgages, your broker will charge you a fee to find the best commercial mortgage rates. This is usually between 1 and 2%.
These include paying for services provided by a real estate lawyer or notary, such as performing a title search, and registration fees and disbursements. This usually costs $3,500 or more.
An appraisal is necessary to determine the value of the property, which will dictate how much money you're able to borrow. The more the property is worth, the more you're able to borrow – but you'll also have to pay more for your down payment. The normal cost is around $1,500.
Title insurance is a low, one-time cost that protects the legal property owner from future title fraud and challenges. It's valid for as long as you're the owner of the property, making it a very cheap way to protect yourself. On average you can expect to pay about $1,500.
CMHC will not insure a purely commercial property, but they will insure a commercial mortgage that will be used as a residential property, like an apartment complex, retirement dwelling, licensed care facility, or condominium building.
The bar for commercial mortgages is quite high because they're riskier than normal mortgages. Some of the criteria you'll have to satisfy are:
How much lenders are willing to let you borrow is directly related to how much debt you already have. The actual number value of your debt isn't important, what's important is how much debt you have relative to your cash flow. The debt service coverage ratio (DSCR) is calculated as:
A good personal credit score bodes well for your business because it means that someone responsible is at the helm. The lower your score, the less likely it is that you'll be approved for a commercial mortgage.
It isn't every day that average investors try and get a commercial mortgage. Usually, it's businesses that are applying for them – so it's imperative that your business is in a good financial position. Your lender will want proof that your business will be able to earn enough revenue to pay for the mortgage, and often require a minimum net worth of $100,000 - $200,000.
Your type of business may also play a factor in your approval. Is your business poised for growth?