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Canada is a country in North America with many small businesses and a thriving economy. Part of the reason enterprises is financially successful in Canada is that of tools available to them like commercial mortgages. A commercial lease is for businesses that need to develop existing, or new property, in addition to projects in residential or commercial development. This is attractive to companies because the loans typically have lower interest rates, you gain equity with each mortgage payment, and makes it easy to plan financially for other critical business issues. Should you choose to pursue a commercial mortgage in Canada, there are specific criteria you need to satisfy. Mainly your debt service coverage ratio, your credit history, and your current business situation are evaluated.
At Smarter Loans, our goal is to make it easy as possible for you to get the commercial mortgage you are looking for. Below you will find a lost of the loan providers in Canada, who are willing and able to help you. You can compare the firms by the down payment required, repayment terms, and expected timeline of repayment. When you are ready, click “Apply Now” beside the company of your choice to finish an online application. Since accessing credit history is harder for commercial loans, it may take a bit longer to determine your approval status. Once approved, you can expect the money in just a couple of days, and if you don’t have a high credit score, don’t worry, many of the companies below can still help you.
You also have the option to “Pre-Apply” with Smarter Loans, and we will connect you to the most suitable commercial mortgage lender in Canada.
We can help connect you with the top commercial mortgage and mortgage refinancing providers in Canada.
A commercial mortgage is a mortgage taken out for a commercial property. Similar to a residential mortgage, the (commercial) property is used as collateral. But unlike a residential mortgage, instead of being an individual, the borrower is usually a company. The company may be a sole proprietorship, partnership or corporation.
Determining a company’s creditworthiness is more complex than that of an individual. Commercial mortgages also tend to be riskier and there are fewer lenders providing them. This results in the interest rates being higher on commercial mortgages than residential mortgages.
We’ve discussed what a commercial mortgage is. Now let’s talk about what a commercial property is.
There are various types of properties that may be considered commercial properties. You’ll want to determine the property type that you’re looking for mortgage financing for ahead of time to help you hone in on the best mortgage option.
You may be surprised to learn that residential properties can actually be purchased using commercial mortgages if you’re buying the property for investment purposes. The main types of commercial properties are pure residential (one to four units; five units and more) and residential commercial mixed. You’d also need a commercial mortgage if you were looking to buy industrial, office or retail properties.
Commercial mortgages tend to have a longer timeline than residential mortgages. Whereas residential mortgages tend to close in 30 to 90 days, commercial mortgages tend to close in two months to a year.
It’s important to shop around when you’re looking for a commercial mortgage. The terms and conditions between lenders can vary greatly, not to mention the interest rates, so you’ll want to do your own due diligence before signing on the dotted with any lender.
Since commercial mortgages tend to carry more risk than residential mortgages, lenders look at several criteria before extending you a commercial mortgage loan.
Similar to residential mortgages, lenders will look at your debt service coverage ratio. This is the main qualifying criteria lenders use. This ratio looks at the amount of cash required to repay the commercial loan payments. Most lenders will expect you to put in your own funds and reduce to the loan to value of the property.
Lenders will look at both your personal and business’s credit history. A lender will not only want to know you have a track record of paying off your personal debts; it will also want to know your business has a history of paying off debts, too.
The stability of your business is another factor lenders look at. A lender will want to know that your business has a history of stability in earnings and profit. A lender will also want to see financial projections. Some lenders will ask for a minimum net worth threshold before they’ll extend commercial mortgage financing to you.
Lenders expect you to have some skin in the game, too. Depending on the type of property you’re buying, you can be expected to put 20% down or more.
Eligibility for a commercial mortgage is more complex than for a residential mortgage, as the company’s financial position must be analyzed thoroughly. Most lenders will require the following: business history lasting at least two years; proof of profitability and revenues, including a business plan and financial projections showing a minimum debt-service coverage ratio of 1.25; and a minimum credit score for both the business and the owner(s) of the business. In addition, the requirements for a down payment are generally higher than with a residential mortgage, ranging from 20% to 50%. The type of business you are in also affects what kind of commercial mortgage you can get.
If your company doesn’t meet some of these criteria, don’t lose heart: there are alternative lenders designed to help newer businesses, those with poor credit scores, and businesses in unusual situations. You will probably still have some options to choose from!
The interest rate on a commercial mortgage is affected by a few different factors relating to the financial position of the company doing the borrowing: its debt-service coverage ratio, its credit score, the size of its down payment, and other pertinent financial data. The variability in the type and size of businesses taking on commercial mortgages means that interest rates fluctuate quite a lot – generally anywhere from 4% to 10%. Both fixed rate and variable rate commercial mortgages are available.
Commercial mortgages can be taken out on a range of property types, including industrial buildings, multi-use properties, multi-family residential properties, office buildings, medical buildings, retail plazas, warehouses, and land intended for development. Mortgage funds can be used to fund the purchase, or to cover the costs of property renovations or additions. Residential properties used solely for investment purposes do qualify for commercial mortgages, but generally this is only useful if it is a property containing five or more units. Different lenders may have restrictions on the type of properties they cover, so always check before applying.
Mortgage amounts vary, both by lender and according to each borrower’s situation. Many of the larger, traditional lenders (like banks) have minimum borrowing amounts – usually around $500,000, although some have a lower limit of $1 million. Maximum amounts can be as high as $40 million.
Commercial mortgages are more costly than residential mortgages; as well as higher interest rates, there are also a range of fees: lender fees, broker fees if you use a broker, appraisal fees, legal fees, title insurance, and mortgage insurance (as the Canada Mortgage and Housing Corporation will not insure purely commercial properties). Some lenders also require Environmental reports and Building Condition reports, which the borrower must pay for.
It’s not really possible to use a commercial mortgage to access funds for personal use, as a commercial mortgage needs to be taken out on a company-owned property (or dedicated investment property). And even if you could get your company to agree to allow you to use funds released in this manner for yourself, the terms for a commercial mortgage are usually stricter and more expensive than on a residential mortgage – making it pointless as a mechanism for accessing affordable financing.
Many lenders offer commercial mortgages, but where exactly you go will depend on your company’s condition and what you’re looking for. If you meet all the standard qualification criteria and are looking for a larger loan on a shorter term, banks and credit unions may be a wise bet. They do have restrictions on what kinds of property they cover though. The Business Development Bank of Canada is an option for smaller or less established businesses. There are also online and alternative lenders, who may be more forgiving in terms of eligibility criteria. And some companies may be able to access private financing for their commercial real estate needs.
The Business Development Bank of Canada (BDC) is an institution set up by the federal government with the sole purpose of helping Canadian entrepreneurs with their finances. For this reason, commercial mortgages are available through the BDC to smaller or newer companies. Their terms tend to be more generous than with traditional lenders; their loan lengths are usually longer and their fees and penalties lower.
It is certainly possible with some lenders to use a standard commercial mortgage for an agricultural property, but you do have other options available. Both farm mortgages and acreage mortgages are widely available throughout Canada, and are designed to furnish the country’s many farmers with affordable alternatives that suit their particular needs better than a standard commercial mortgage.
Construction mortgages are distinct from commercial mortgages, and are specifically geared towards commercial owners looking to construct brand new facilities or buildings, rather than purchase something existing. These loans tend to be much shorter term (standard is five years) and can be converted to a different mortgage type once construction is complete. They are also available as interest-only loans, which is not an option with other commercial mortgage types. This helps owners make their debt payments as the property is being constructed, before they have income from its use.