Commercial Investment Mortgage - What You Need to Know
January 8, 2019 | Posted by:
Last week we discussed the positive outlook for residential investment mortgages in the greater Winnipeg area. In doing so, we touched on the concept of using a residential investment property to earn revenue, which may also define it as a commercial interest, and that leads us to today’s topic - commercial investment mortgages as they apply to individuals and small personal corporations. Let’s get to it.
3 Things You Need to Know About Entering Into a Commercial Investment Mortgage in Winnipeg Manitoba
What Constitutes a Commercial Mortgage Property
On the surface, most people consider any building to be used in the course of conducting business to be a commercial property. Office and retails spaces are easy enough to identify as commercial mortgage targets. However, residential and industrial properties may count too. Below is a general accounting of what can be considered for a commercial mortgage:
- - Multi-family Residential (5 or more units) if used as a pure investment property
- - Residential commercial mixed
- - Office space
- - Detached retail space (for provision of products and/or services)
- - Commercial plaza
- - Industrial (including agricultural, manufacturing, etc.) space
I must be noted that while a four-plex (4-units) is a technically a residential mortgage in Canada, some lenders may be uncomfortable with the risk associated with lending the amount required to take on a 4-unit property under a lower (than commercial) mortgage rate, unless your credit score and income prospects are impeccable (more on this below). In some cases, lenders may push for a commercial rate at 4-units.
A More Stringent Vetting Process
Commercial properties are commonly considered by lenders to be much riskier than residential. After all, repayment as they see it is dependent on how well the business does. Qualifying for a commercial mortgage investment is contingent upon the following:
- Debt-service coverage ratio - Since lender decisions are based on the current and/or prospective income of the business, they will demand a certain ratio of cash available to the required loan payments. Ideally you will need a ratio of 1.25 to be considered for a loan.
- Credit history - Regardless of whether or not you have incorporated or entered into a partnership, savvy lenders will still look at your personal credit history and they will likely be much more strict here than when compared to a residential mortgage. Make sure your credit score is in check.
- Business plan - While a business plan is required to get a business loan, it may also be requested by commercial mortgage lenders too. This is especially true if you are getting a commercial mortgage loan as the owner of the business operating in a space.
- Higher down payment required - You’re going to need at least 20%, but don’t be surprised to see that figure tick upward towards 35% unless you are strong in all other qualifications addressed here.
- Shorter mortgage term - Commercial mortgages carry shorter terms than residential, typically 10 years but can go as high as 20 years. Be prepared to be able to cover the higher value of payments that come with short term mortgages, and be ready with a larger (compared to monthly) balloon payment at the end of the term.
- Higher mortgage rates - This should come as no surprise. Mortgage rates will be a couple of points higher than that of a residential. However, be sure to work with a mortgage broker to secure the best possible (and unadvertised) rates. More on this below.
A Broker is Not Just Helpful, But Essential
Going into a residential mortgage without the help of a broker results in missed opportunity (on better rates) but to even think about entering into a commercial mortgage without a broker at your side can be the worst possible way to start your investment ambitions.
For one, your ability compare rates is diminished due to the fact that preferred (by investors) commercial rates are not typically advertised. Only a commercial broker will have the kind of access to the preferable rates that you need to make your investment make fiscal sense. In addition, the criteria, terms, and conditions between commercial lenders can differ much more than that of residential. Your ability to decipher these differences and define the T&C’s that make the most sense for your unique financial status and goals is contingent upon the assistance of a commercial broker.
A reputable commercial mortgage broker will have vast experience in navigating the playing field of multi-residential properties, offices, industrial parks, retail plazas, and more. This experience affords them not just know-how, but has formed relationships with lenders that they can connect you with. If you’re considering a commercial mortgage in Winnipeg be sure to contact Ron Chan before taking the next step.