Commercial Real Estate Mortgages Explained
Everything you need to know.
2.7 min read.
When purchasing a property, whether residential or commercial, taking out a mortgage is necessary if you cannot pay the property's total price out of pocket. A commercial mortgage can be defined as a loan given to a business to purchase a commercial property. The loan can come from a financial institution or a private mortgage lender.
Knowing the fundamental differences associated with residential and commercial mortgages is essential if you are in the market to purchase a commercial property.
Lower Loan-to-Value Ratio
The loan-to-value ratio (LTV) determines the maximum amount of a secured loan based on the property's market value that is guaranteed as collateral. The market value of the property or asset is the predetermined price that it would sell for if on the open market. When it comes to commercial mortgages, the loan-to-value ratio may be lower, meaning the loan covers less of the total value of the property. Why? Financial institutions offer different ratios depending on the type of commercial property. To calculate the approximate loan-to-value ratio, divide the amount of the loan requested by the market value of the asset that the business gives as collateral to the lender.
Higher Interest Rates
Commercial mortgage rates are often higher than residential mortgage rates. The interest on commercial mortgages can be anywhere between 0.25% and 0.75%. A key factor to consider is that registered companies often purchase commercial properties rather than individuals. Commercial properties can vary in type and business structure, making the risk assessment for lenders significantly more complicated.
Shorter Amortization Periods
The amortization period is the total length of time it takes to pay off a loan. Commercial mortgages are usually amortized over 20 years or more and repaid in regular instalments, compared to residential mortgages that can be amortized for 25 years or more. The shorter the amortization period, the less interest you would pay; however, you must may higher payments on the principal amount.
When purchasing commercial real estate, it is vital to keep changes in the market, such as asset value, rising interest rates and market risks in mind.
References
What is a commercial mortgage. BDC.ca. (n.d.). Retrieved March 22, 2022, from https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/commercial-mortgage
What is an amortization period. BDC.ca. (n.d.). Retrieved March 22, 2022, from https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/amortization-period#:~:text=The%20amortization%20period%20is%20the,of%20the%20loan%20before%20interest).
What is the loan-to-value ratio? (LTV ratio). BDC.ca. (n.d.). Retrieved March 22, 2022, from https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/loan-to-value-ratio
Why are commercial mortgage rates higher than residential mortgage rates? Mortgage. (n.d.). Retrieved March 22, 2022, from https://mortgagecapitalinvestment.com/why-are-commercial-mortgage-rates-higher-than-residential-mortgage-rates/#:~:text=Factors%20That%20Contribute%20to%20Higher,storage%20facilities%2C%20and%20retail%20sites.
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