Different Types of Commercial Mortgages

A commercial (or industrial mortgage) mortgage can help you finance a new commercial property, expand an existing premise, or even consolidate business debt. With interest rates near record lows, it’s a great time to consider a commercial mortgage.

What is a Commercial or Industrial Mortgage?

Where a residential mortgage is typically taken out by an individual borrower, a commercial mortgage is a loan secured by a company or businesses and the commercial property, such as an office building, hotel, industrial warehouse, shopping centre, or apartment complex, is used as collateral.

Commercial mortgages are a popular option for businesses looking to purchase or refinance income producing properties because it typically provides long-term funding that can range from $500,000 to $1.0 million (for a smaller commercial mortgage) to well over $2.0 million.

Because of the structure and purpose of a commercial mortgage , the rules for obtaining a commercial mortgage are more demanding than a simple residential loan. In addition to assessing credit history and doing a detailed analysis of the business in question, it’s important to understand that commercial mortgage rates are higher than residential rates.

Commercial Mortgage Properties

A number of properties can be classified as a commercial property. The most obvious types of commercial properties you would consider for a commercial mortgage would include an office, retail property, or industrial property.

Residential real estate is also eligible for a commercial mortgage but only if it is purchased as an investment property. Residential investment properties fall into three different categories: pure residential (1-4 units), pure residential (5 or more unites) and residential commercial mix.

These kinds of residential properties include: high-rise and mid-rise condominiums, single family homes (townhouses etc.), apartments/condominiums designed for rental purposes, retirement and nursing homes, student housing developments, and mixed use property development (residential component must represent at least 80% of the overall project).

Basic Types of Commercial Mortgages

Once you decide what kind of property you are financing and secure funding, it’s important to decide on what kind of commercial loan is best for your company. Below are four different types of commercial loans to consider.

Fixed-Rate Amortized Commercial Mortgages

A fixed-rate amortized commercial mortgage is a loan where the interest rate never changes and the monthly payments are the same. This is a great option for those looking to lock in low interest rates.

With a fixed-rate amortized commercial loan, a higher percentage of the monthly payment goes toward interest in the beginning. The closer you get to paying off the loan, the ratio will be reversed, and a larger portion goes to the principal.

For example, in the initial stages of the fixed-rate amortized commercial loan, 95% might go toward interest while just 5.0% goes toward the principal. The ratio is reversed the closer you get towards the end of the loan.

Variable Rate Amortized Commercial Mortgages

With a variable rate commercial loan the interest rate fluctuates. A variable rate commercial loan is a great idea when rates are low, and could go even lower. On the flip side, it means less of the monthly payment goes to the principal if the rates increase. This also means the amortization period will be extended.

While there is more inherent risk with a variable rate commercial mortgage, it can save you a lot of money if you think interest rates are going to be low for a long period. Keep in mind, if interest rates do rise, the monthly payments will also rise.

Interest Only Commercial Mortgages

An interest only commercial loan is a great option for businesses that have little capital and or need their payments to be as low as possible in the beginning. That’s because, with an interest only loan you only pay the interest portion of the loan. This also means no money is going toward the principal loan amount.

In theory, you can never pay off a loan by making interest only payments. With an interest only commercial mortgage, the “interest only” portion of the loan only lasts for a set period of time. After which, you need to start paying both the principal and the interest. Compared to just paying the interest, this blended payment will be considerably higher.

Commercial Balloon Mortgage

A commercial balloon mortgage is a loan where the borrower makes small, regular payments that go towards the principal and interest. At the end of the amortization period, (usually 5-10 years) the remainder of the loan is due in a lump sum.

That said, with a commercial balloon loan, you can make additional payments during the term of the mortgage. This will reduce the lump sum needed to pay off the loan at the end of the amortization period. And help pay off the loan more quickly.

Many businesses who take out a commercial balloon payment will refinance into an amortized loan (fixed or variable) after a few years to avoid having to make the final balloon payment.

Canadalend.com—Your Commercial Mortgage Experts

There is a lot to consider when it comes to securing a commercial loan mortgage. In addition to understanding what kind of property it is you want to finance you need to determine which type of commercial mortgage loan is best suited to your corporate needs.

At the same times, Canada’s big banks make it difficult for businesses to qualify for a commercial mortgage. If your business is new, struggling, or in debt, it could be difficult to secure a commercial loan.

As the country’s leading private commercial mortgage professionals Canadalend.com is dedicated to helping your business meet its short and long-term cash flow needs. Unlike Canada’s big banks, which only offer their own products, whether they suit your needs or not, the licensed, independent agents at Canadalend.com have access to hundreds of commercial mortgage lenders. Many of which specialize in providing commercial mortgages to clients with bruised credit or have filed for bankruptcy.

To apply for a commercial mortgage, contact Canadalend.com today. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.