Most Canadians are familiar with residential mortgages. After all, homeownership is something most people aspire to, so the ins and outs of home loans and mortgage rates tend to reveal themselves to consumers as they take their first steps toward purchasing a property. However, unless an individual is a business owner or investor, they might not understand the intricacies of commercial mortgages.

What is a commercial mortgage?

Put simply, a commercial mortgage is a loan for real estate that is used for business. Whereas a person’s house or condominium may require a residential mortgage, commercial mortgages are used for properties that are used for office space, retail, manufacturing and other non-residential services.

Just as with residential mortgages, commercial mortgages come in many shapes and sizes. Traditional commercial mortgages can be both adjustable-rate and fixed-rate. While adjustable-rate commercial mortgages can be riskier for borrowers, they can also make it easier to qualify for a larger loan amount.

Commercial mortgages can also come in the form of interest-only loans. These types of mortgages can be made available to borrowers who are able to show that a property’s future profits will grow over time. Interest-only commercial mortgages make is possible to make much smaller monthly payments on the loan for a specific period of time.

Additionally, borrowers can also take out second mortgages when it comes to commercial loans. When a borrower or business investor is in need of funds, taking out a commercial second mortgage can be a good way to obtain money quickly.

Besides traditional commercial mortgages, there are other financing options when it comes to commercial real estate. These include bridge loans, land development loans and other options.

Qualifying for a Commercial Mortgage

When it comes to residential mortgages, qualifying for a loan falls squarely on the borrower. Income and credit history are taken into account, and if a borrower doesn’t meet a lender’s standards, the loan is denied. Commercial mortgages, on the other hand, are more about the property itself and the cash flow the property will be earning. Lenders take into account the net operating income of a property, meaning how much money it will be bringing in after payments and depreciation. They also look at the debt service coverage of a property, comparing income against the costs of principal and interest payments.

Commercial Mortgage Types

Just as there are different types of residential mortgages, commercial mortgages come in different shapes and sizes. In addition, there are specific loans that businesses may require on top of their mortgages to keep things running.

The two main types of commercial mortgages, as with residential ones, are fixed-rate and variable. Fixed-rate mortgages lock in a rate for your loan that will not change over time. Variable rates often feature lower interest rates at first but fluctuate over time depending on the market. Fixed-rate mortgages, especially for a loan you plan on holding onto for a while, are the safer choice.

Balloon mortgages offer much shorter terms than amortized loans, with initial payments being very low. However, the last payment on a balloon loan includes all remaining interest and unpaid principal, resulting in a very large total. These loans are far riskier than traditional mortgages. But if you plan on having immediate cash flow for your business, they can be worth it.

Similar to a balloon mortgage, interest only mortgages offer borrowers low monthly payments in their initial stages. Early loan payments will go directly toward interest. Once this period ends, the principal will become due, resulting in much larger monthly requirements.

Additional business loan types include joint venture loans. This type of loan is where more than one person shares in the financial responsibility of taking out a loan. It thereby makes it easier for individuals who can’t qualify on their own. In a participating loan, the lender gets a share of the property’s profits. Not only does the lender receive monthly mortgage payments with interest, but funds from property income as well.

Participating loans

These types of mortgages are unique to commercial lending, as they require a property to generate income. Participating loans are mortgages that allow lenders to share in a property’s profits. The lender will receive some portion of a property’s profits, in addition to monthly payments and interest. Therefore, these loans can make it easier for borrowers to obtain financing.

Land development loans

Traditional mortgages are for purchasing property. Land development loans are for making changes to a commercial property. Any real estate that requires renovations or remodeling work will require funds. Land development loans give borrowers the money they need to make changes and upgrades to existing real estate. If you bought a former retail space and want to convert it into a restaurant, land development loans pay for the changes.

Land development loans typically go towards improving a property to make it more attractive to customers or tenants, as well as make a property more environmentally-friendly. Additionally, these types of loans can be used to improve the value of a property. That makes it easier to obtain a higher asking price upon its sale.

Bridge loans

Bridge loans are an influx of cash. That cash is a tide-over until there are more long-term financing options available. Being a business owner waiting for financing can be tough. They may find themselves in need of fast cash, making bridge loans a valuable tool. They act as a bridge between a business’ immediate monetary needs and long-term financing, hence their name. However, borrowers should keep in mind that bridge loans are only temporary solutions. Additionally, these types of loans typically feature stricter qualifying standards, including for credit and proof of income. Bridge loans also tend to have higher fees than other commercial loans due to their quick availability.

Applying

As with residential mortgages, the process of applying for a commercial mortgage can be arduous. On top of the down payment necessary after qualifying for a loan, lenders often demand a deluge of documents to verify assets, income and debts.

Make sure to have all of the paperwork necessary available. That includes pay stubs, tax returns, statements from banks, stocks, bonds and retirement plans, pension verification forms, copies of leases and rental agreements. In short, the application process can be much more complex than simply buying a home.

SaskEquity is Here to Help

Still not certain about what a commercial mortgage is and how it may apply to your situation? Call SaskEquity today.  SaskEquity has the tools, knowledge and experience to help you every step of the way. When you go it alone, there are situations that you might not be prepared for.

By having a guiding hand like SaskEquity in the mix, you can feel comfortable and confident finding a commercial mortgage. Don’t find yourself in a position you would otherwise like to avoid. Let our team help you through the process.

Navigating through a tough market can feel scary and, at times, impossible. With SaskEquity at your side, you can not only find the property that you have been looking for but avoid giving up your rights.