Mortgage Blog

Buying a Commercial Property?

March 3, 2020 | Posted by: Brandi Pierik and Matthew Pierik - Red Deer and Calgary Mortgage Brokers

Buying a Commercial Property? Read This First

Buying a commercial property is much more complex than when purchasing a home or vacation property. You’re often dealing with a different pool of lenders, and there are several additional considerations to address during the commercial mortgage application process.

The main differences in commercial mortgage financing include:

- Paying higher interest rates

- Paying fees to the lender and mortgage broker

- Longer turnaround times

- Lower loan amounts

You can also expect out-of-pocket expenses to run much higher for a commercial mortgage than for a residential one. Once you decide on a commercial property, be sure to ask for a breakdown of fees so there are no surprises along the way.

Interest rates

Commercial mortgages are generally priced about 1%-2% higher than residential mortgages. You commonly have a choice between a variable- or fixed-rate product, with terms of one to five years, much like a residential mortgage.

Commercial interest rates are not generally posted as each application is assessed on an individual basis, depending on the level of risk involved for the lender.

Some lenders have minimum and maximum loan amounts, depending on their available funds. You may find a lender that will lend a minimum of $1 million to a maximum of $10 million. And the maximum amortization for most commercial mortgages is 25 years.

Lender and mortgage agent fees

In addition to paying higher interest on a commercial mortgage, you can also expect to pay a fee to both the lender and mortgage broker due to the complexity involved in a commercial application as well as the length of time it takes to reach the funding date.

Although there is no set rule as to what fee is charged, the higher the risk and the more difficult the application, generally the higher the fee. A lender may charge a fee that ranges from 0.5% -2% of the borrowed amount, and your mortgage broker will likely match that fee.

Timing and deadlines

It’s also important to note that the process for a commercial mortgage can take much longer than a residential one. This is mainly due to the extensive amount of work and research that’s needed for reports and analysis of the application.

Generally, the reports required to complete a commercial mortgage, such as an appraisal and environmental assessment, take a minimum of four to six weeks to prepare. The review of the application by the lender also takes longer thanks to the extra due diligence required (up to four weeks).

This means that the completion and subject removal dates must provide ample time to allow for the required documentation to be prepared and analyzed. It’s not unheard of to have subject removals four to six weeks out with the completion date falling another four to six weeks after subject removals.

Loan amounts

When it comes to commercial financing, you’ll find an acceptable loan to value (LTV) is reduced when compared to the residential market (up to 95%). This is often due to the slower turnover of commercial properties.

Most banks and credit unions will only allow financing up to 60%-65%, although some lenders will lend up to 75%-80% if required.

Have questions about what to expect when purchasing a commercial property or your mortgage in general? Answers are just a call or email away!
Brandi Pierik
Mortgage Broker
DLC A Better Way
403-588-8657

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