A commercial mortgage is usually the name for a loan that is secured by real estate. This means that the loan will be paid back on time and in full. It is similar to a residential mortgage, but the difference is that the collateral and building bought with the mortgage are used for business instead of living.
A loan would be considered a commercial mortgage if, for example, a business owner needed to move his office from his home to a storefront, office, or warehouse because his business was growing.
If, on the other hand, she just wanted to add a few feet to her home office and needed a mortgage loan to do so, that loan would likely be considered a residential mortgage instead of a commercial mortgage.
The way the bank looks at the ability to pay back the loan is another difference between a commercial mortgage and a home mortgage. The borrower's credit history and current ability to pay back the loan will determine if he or she is approved for a home loan and what the rate will be.
When deciding whether to give a commercial mortgage, a lender would look at the value and quality of the property being bought with the loan, as well as its ability to bring in money.
Even if the borrower has great credit, a mortgage for commercial rental property in a town where there aren't enough rentals and people move in and out all the time would be looked at less favourably.
Even if the borrower's credit wasn't perfect or was even bad, he or she would get the loan over the person with perfect credit in the town, which isn't a good sign for getting all the rentals filled.
Interest rates on commercial mortgage loans are much higher than interest rates on home mortgage loans. Most of the time, however, these are fixed-rate loans, which means that the borrower pays the same amount of interest over the life of the loan.
There are some commercial mortgage loans with fixed rates or rates that change over time, but they are not the most common.
If you've been a home owner and mortgage borrower for a long time, but this is your first time getting a commercial mortgage, you may be surprised by how much more complicated and time-consuming it is than getting a residential mortgage.
That's because the rules set by the government require lenders to look at the property's history of stability and income to figure out how much money it could make in the future. After this potential for making money has been proven to be good, the commercial borrower's credit history, financial strength, and assets are looked at.
The application for a commercial mortgage is long enough that you might do better with the help of a commercial mortgage broker. You'll probably have to show how the property and your own finances have changed over the last two years.
Most of the time, there are strict rules about how this information must be presented, but an experienced and knowledgeable mortgage broker can help you get over these commercial mortgage hurdles and on your way to a great fixed or variable rate commercial property mortgage.
