A commercial mortgage is a loan secured by commercial real estate, such as office buildings, retail spaces, industrial properties, or multi-family residential buildings. Unlike residential mortgages, these loans are designed for business purposes — helping entrepreneurs, investors, and corporations purchase, refinance, or develop commercial properties.
Securing a commercial mortgage in Canada can be complex due to varying rates, lender requirements, and property types. This guide will break down everything you need to know about commercial mortgages in Canada, from their types and interest rates to eligibility criteria and the application process.
What Is a Commercial Mortgage?
A commercial mortgage is a loan used to buy, develop, or refinance commercial properties. Banks, credit unions, or private lenders typically offer these loaner acts as collateral, giving lenders security in case of default.
Unlike residential mortgages, commercial loans often have stricter terms and require detailed business plans, appraisals, and proof of revenue generation.
Types of Commercial Mortgages in Canada
There are several types of commercial mortgages available, depending on your business goals and property type:
- Owner-Occupied Commercial Mortgages
- For businesses purchasing property for their operations (e.g., retail stores, offices, or warehouses).
- Investment Property Mortgages
- For investors buying properties to generate rental income (e.g., multi-unit residential buildings or commercial plazas).
- Construction Mortgages
- These loans are used to fund new commercial property development or significant renovations. They often release funds in stages as construction progresses.
- Bridge Loans
- Short-term loans to “bridge” the gap between buying a new property and selling an existing one, offering temporary financing.
- Land Development Loans
- For purchasing vacant land with plans for commercial development.
How Do Commercial Mortgage Rates Work in Canada?
Commercial mortgage rates in Canada are influenced by several factors, including:
- Property type: Rates differ for retail, office, industrial, and multi-family properties.
- Loan-to-Value (LTV) ratio: Higher LTV ratios may come with higher rates.
- Creditworthiness: Strong business credit scores secure lower interest rates.
- Economic conditions: Rates shift based on inflation, the Bank of Canada’s policies, and the overall economy.
Interest rates can be either:
- Fixed rates: Locked-in for a set term (usually 1–5 years), providing stable payments.
- Variable rates: Fluctuate with the lender’s prime rate, offering flexibility but with risk.
As of 2024, commercial mortgage rates in Canada typically range from 4.5% to 7%, but rates vary based on the lender and loan terms.
Eligibility Criteria for Commercial Mortgages
Lenders assess several factors when determining your eligibility for a commercial mortgage in Canada:
- Credit Score
- A strong personal and business credit score increases your chances of approval.
- Down Payment
- Typically, commercial mortgages require a down payment of 25% to 35% of the property’s value.
- Debt Service Coverage Ratio (DSCR)
- Lenders use the DSCR to ensure your business generates enough income to cover mortgage payments.
- A DSCR of 1.25 or higher is often required.
- Business Financials
- You’ll need to provide financial statements, cash flow projections, and proof of business income.
- Property Appraisal
- A professional appraisal ensures the property’s value matches the loan amount.
- Business Plan
- Lenders may request a business plan outlining future revenue if purchasing a property for business use.
Steps to Apply for a Commercial Mortgage in Canada
Step 1: Prepare Financial Documents
Gather your business and personal financial records, including tax returns, income statements, and balance sheets.
Step 2: Define Your Property Goals
Decide whether you’re buying for owner-occupancy, investment, or development purposes.
Step 3: Get a Property Appraisal
Hire a certified appraiser to assess the property’s market value.
Step 4: Calculate Your DSCR and LTV Ratio
Ensure your DSCR meets lender requirements and confirm how much you can offer for a down payment.
Step 5: Research Lenders
Explore banks, credit unions, and private lenders. Consider their interest rates, loan terms, and reputation.
Step 6: Submit Your Application
Complete the lender’s mortgage application, attaching your business plan, appraisal, and financial documents.
Step 7: Underwriting and Approval
Lenders review your file during underwriting, assessing risk and determining loan approval. This may take 2 to 6 weeks.
Step 8: Finalize and Close
Once approved, sign the mortgage agreement, pay closing costs (e.g., legal fees, land transfer tax), and receive funding.
Benefits of a Commercial Mortgage in Canada
- Property Ownership
- Build equity over time and secure a stable business location.
- Business Growth
- Expand operations by purchasing or developing new spaces.
- Tax Deductions
- Interest payments and some property expenses may be tax-deductible.
- Flexible Loan Options
- Choose from various loan terms, repayment structures, and interest rates.
- Income Generation
- Investment properties provide rental income, boosting your cash flow.
Challenges of Commercial Mortgages
- Higher Down Payments
- Expect to pay at least 25%–35% upfront.
- Stringent Approval Process
- More complex and time-consuming than residential mortgages.
- Interest Rate Fluctuations
- Variable rates can pose financial risks if the prime rate rises.
- Property Risks
- Commercial properties may experience tenant turnover, affecting cash flow.
How to Choose the Right Commercial Mortgage Lender
When selecting a lender, consider:
- Reputation: Check client reviews and industry standing.
- Interest Rates: Compare fixed and variable options.
- Loan Flexibility: Ensure repayment terms suit your business model.
- Speed of Approval: If time-sensitive, choose lenders with quick underwriting processes.
Consult with a mortgage broker for personalized advice.
Conclusion
Securing a commercial mortgage in Canada is crucial for business owners and investors looking to purchase, develop, or refinance commercial properties. Understanding the types of mortgages, eligibility criteria, and application process helps you make informed decisions.
Whether expanding your business or investing in commercial real estate, having the right financial partner is essential if you’re ready to explore commercial mortgage options, research lenders and prepare your financial documents.
At grant-x, we’re committed to helping businesses secure the funding they need to grow.
