Whether your mortgage financing is commercial or conventional, presenting a down payment is always essential. Should your personal contribution in this case be higher? What are the specificities of a commercial mortgage? Find answers to all your questions about financing commercial real estate with your Xperto mortgage broker.
Commercial mortgage: what you need to know
A commercial mortgage is a loan generally granted to a business or investor who wishes to acquire a commercial building. It can also be granted to a borrower for financing a residential rental property. You can therefore consider applying for a commercial mortgage loan to purchase different types of buildings: multi-unit buildings (often more than 5 units), offices, retail spaces, industrial buildings, etc.
What are the differences with a residential mortgage?
A residential mortgage loan allows financing of real estate intended for habitation such as a house or apartment. As a buyer, you will need to turn to this type of financing when you want to acquire a residential rental building including up to 4 units. Starting from 5 units, the general rule is that you opt for a commercial mortgage. However, some mortgage lending institutions give you the possibility of obtaining financing for properties with up to 8 units by applying for a residential mortgage.
Requirements therefore vary from one mortgage lender to another. In the context of financing a residential building, the bank focuses on the borrower’s personal financial situation.
For commercial real estate mortgages, it also evaluates other criteria such as:
- the building’s profitability,
- its condition,
- credit score,
- borrowers’ net worth,
- the company’s financial strength.
Interest rates for commercial mortgages also vary according to the economic context.
Commercial mortgage loan: for whom?
Commercial mortgages are accessible to all people seeking funds to use in their businesses. They are thus aimed at all professionals such as:
- merchants,
- liberal professions,
- craftspeople,
- leaders of SMEs, very small businesses, etc.
Individuals are therefore excluded from this type of commercial financing. Commercial mortgages are particularly suited to professionals who have a need for money to develop rapidly. You can apply for a commercial mortgage loan to finance different projects such as:
- a new office,
- a new headquarters for your company,
- renovations in your existing commercial property.
In the case where monthly payments are no longer honored, the real estate on which the mortgage is based becomes at risk.
What is the minimum down payment?
The minimum down payment for a commercial mortgage is evaluated based on the loan-to-value ratio (LTV). This term designates the percentage of the commercial mortgage amount that the borrower will benefit from relative to the property price. It’s a variable ratio depending on the type of building concerned by the investment. The LTV is approximately:
- 80% for mixed buildings (commercial and residential),
- 85% for multi-unit type properties (5 units or more),
- 75% for an office building or industrial building,
- 55% for agricultural land.
Your down payment corresponds to the remaining percentage, not covered by the loan-to-value ratio. For the financing of a multi-unit building with a commercial mortgage loan, you will need to have an amount equivalent to approximately 15% of the property price. The down payment to finance an industrial or office real estate property via a commercial mortgage represents approximately 25% of the total amount.
When is CMHC mortgage insurance required?
Obtaining the down payment requested by the bank can be a major challenge for the future owner and their company. When this money is less than 20%, you will need to take out mortgage loan insurance such as that from the Canada Mortgage and Housing Corporation (CMHC).
Thanks to CMHC, borrowers can obtain a mortgage loan to finance beyond 80% (up to 95%) of the total investment price. Insurance helps limit risks in order to obtain your credit while enjoying a low interest rate. It also protects mortgage lenders who have additional guarantee in case beneficiaries no longer make monthly payments to repay the loan.
The CMHC mortgage insurance premium is variable. It ranges between 2.80 and 4% of the loan amount and is determined taking into account the down payment made. The higher your contribution, the lower the premium percentage.
Canadian borrowers eligible for CMHC mortgage loan insurance must meet certain criteria. During the application period, a credit score of at least 600 is required. The gross debt service (GDS) ratio must not exceed 39%. The limit is 44% for the total debt service (TDS) ratio.
The down payment for a commercial mortgage must also be obtained from the borrower’s own resources (income, assets, etc.) and not from another credit. A ceiling of $1,000,000 is also set for the property purchase price.
Other factors for obtaining a commercial mortgage
The process to benefit from a commercial mortgage loan can be quite complex. The lender will first verify the company’s solvency, the investment project’s profitability in the short and long term as well as its risks. The elements taken into account in studying your application vary according to the type of commercial mortgage.
For acquiring a residential rental building, you will need to present documents providing various information. This includes the number of units in the property, their respective area, rental prices or the list of current tenants. The lender will also study the building’s financial statement, the income it generates, the borrowers’ financial statement, etc.
To obtain financing for a commercial building for your business, the file provided to the mortgage lender must include documents such as:
- company summary and history,
- environmental report,
- financial statement report,
- description of management experience,
- production plan,
- marketing strategy…
Whatever your project, it will be a matter of presenting your profile as an investor and that of your company to convince mortgage lenders. Using the services of a broker specialized in commercial mortgages allows for personalized support. You are followed at each step of the process by an expert who gives you the best advice to obtain your mortgage loan.