What is a Commerical Mortgage?
A commercial mortgage is a loan taken out on commercial real estate (as opposed to residential) with the property as collateral. The borrower is generally a company or business as opposed to an individual and the business may be either a partnership, limited company or incorporated.
Consequently, assessing credit history is more complicated with this type of mortgage.You can also expect commercial mortgage rates to be significantly higher than residential rates due to the increased risk.
Types of properties
There are a number of properties that can be classified as commercial properties. It is important to identify exactly what type of property you are looking to finance. Residential real estate can be financed under a commercial mortgage if it is purchased as an investment property. This can fall into one of three categories.
- Pure residential, 1-4 units
- Pure residential, 5 or more units
- Residential Commercial Mixed
There are a number of other properties that fall under a commercial mortgage. You would consider a commercial mortgage if you are looking to finance an office, retail or industrial property.
Commercial Mortgage Insurance
Insurance for a commercial property is more complicated than with a residential property.For instance, CMHC won’t insure a pure commercial property. However, they may insure a mixed residential - commercial property with a down payment as low as 15%.With a personal residential property, the lender can be assured that the borrower will make mortgage payments a priority. However, with a commercial mortgage, it is easier for the borrower to declare bankruptcy is business isn’t going well and default. So, lenders need the security in the form of insurance.
Mortgage broker fees
If you use a mortgage broker to help you connect to a lender with a competitive rate, then the broker will charge you, the client, a finder ’s fee. This can fall somewhere in the range of a few thousand dollars.Some of the best commercial mortgages are now offered by private funds such as pension funds, credit unions, mortgage conduits and speciality “niche” lenders.