How do Commercial Mortgages work in Canada?

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Commercial Mortgages in Canada

When it comes to business ownership it often creates the need for the commercial property. If you are a limited or incorporated business or even a partnership business which is in need of commercial property then chances are you will need financial assistance for its purchase. This may mean that you require a commercial mortgage. If you are need of this type of lending then you should understand the basics of what a commercial mortgage entails so you can make informed decisions. This type of mortgage has some significant differences when compared to residential mortgages.

What is a Canadian commercial mortgage?

A commercial mortgage is given to businesses and investors who want to purchase properties that will produce income or commercial properties. This mortgage is also available to those who want to refinance this type of property.
What type of property will qualify for a commercial mortgage?
The type of commercial property that you need is all going to depend on the type of business that you operate. For example, you may need to be in an industrial location or retail, or perhaps it is office space that you require.
If you are looking at the property itself as an investment then there are some residential type properties that can qualify as commercial. These would be….

  • The residential is comprised of one to four units
  • The residential property is comprised of more than five units
  • The property is composed of both residential and commercial

What types of commercial mortgages are there in Canada?

It is important that you understand the different types of mortgages there are so that you are applying for the appropriate one, which also determines the lending rate. The lending rate is determined by max loan to value ratio
There are commercial mortgages categorized as…
TYPE Max Loan to Value
Storefront with apartments
Residential commercial
(Mixed) individuals 80%
1 to 4 units – Multi-Family Residential Investment property
5 or more units – Multi-Family Residential 85%
Commercial Plaza 75%
Office 75%
Industrial 75%
Farm Land 55%
Construction N/A

What you can expect when seeking out a commercial mortgage Canada?

  • You must be prepared for the commercial mortgage rates to be higher than what is applied for residential mortgages Canada
  • There is a much longer closing when it comes to commercial mortgages which can take anywhere from three months up to a year.
  • It will be quite difficult to do Canada commercial mortgage comparisons because each lender sets their own terms and conditions and they don’t advertise or market these.
  • Each lender has their own criteria for determining the property risk. Usually there is less risk to be considered when the property possesses more business space rather than residential space. Risks are often dependent on the success and viability of the business being operated on the premises.

What do you need to qualify for a commercial mortgage Canada?

Lenders want as much assurance as possible that you are going to be able to meet your financial obligation concerning this type of mortgage.

Cash availability to required loan payments:
This is the debt service coverage ratio which is the main priority for the lenders. They will want proof that there will be enough cash on hand to satisfy the loan payments. You will be expected to invest a portion of your own money into the process to help equalize the loan to value ratio.

Good business and personal credit:
Although you are applying for a commercial mortgage for your business, you as the owner or partner will be expected to have a good credit as the business does. On occasion some lenders will accept those with a less than good credit rating but this is rare.

Current business status:
If your business is in full operations then the lender will want the financials to show that the business is stable and generating a profit. Depending on the lender there may be a net worth requirement. If so these do not have to be liquid funds bout could be RRSPs, or stocks for example.

Business entity:
Not only is the type of commercial property you are mortgaging important but so is the type of business that you are operating. You may need some professional advice here from your attorney or a chartered surveyor.

Your contribution:
You will be expected to put down a higher down payment as compared to what is required for residential property. As a rule for a residential/commercial mix a down payment of 20% to 35% is expected. If your property is all commercial then you may be expected to come up with 50%. The lender will take into account your risk profile when determining the expected down payment.

Insurance for your commercial property Canada
CMHC will not insure a 100% commercial property but they will consider insuring mixed property with a low down payment such as 15%. There is more risk involved with commercial property as a business is more apt to go bankrupt if the business is failing. For this reasons the lenders want insurance security.

Using the right resources
Obtaining a commercial mortgage can be complex and difficult. Relying on the right resources such as a quality and experienced commercial mortgage broker will help you achieve your goals. There will be a mortgage broker fee that you will need to pay but this is usually quite reasonable and is usually a few thousand dollars. It is well worth it as they have the contacts and expertise to find the right commercial mortgage lender for you.

Vik Palan

Vik Palan

Chief Editor -

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