Suppose your business is already generating more than a sustaining income but still needs additional funding to grow. In that case, a commercial mortgage loan will be able to help you expand your business and help you lessen costs. But the real question is, how much could you potentially borrow?
The answer to that question is not very straightforward. Business mortgage lenders have different and complex affordability models. But we have put together this article on commercial mortgage affordability to help you see how much you can get from your commercial mortgage.
How much can I borrow for a commercial mortgage?
Commercial mortgages are used to help raise funds that can be used for various purposes, such as purchasing premises for your business, buying the whole of an established business, or unlocking some of the capital tied up in your existing commercial premises.
The common commercial mortgages can start as low as $150,000. But the answer to “how much” can you borrow is different from one commercial mortgage lender to another. How much you can borrow depends on your net operating income, the type of real estate you are using as collateral, and your property’s value compared to the loan amount.
It can be difficult to compare rates as lending criteria are not typically advertised, and terms and conditions differ greatly. Commercial mortgage lending is usually determined on a case-to-case basis, and the amount your company can borrow can vary across the board.
It is rather advisable to ask the services of a mortgage broker. A commercial mortgage broker typically deals with office, industrial, retail and rental apartment properties and can generally connect you to several lenders in the required area.
Although many mortgage providers use their own in-house commercial mortgage calculator to work this out, the exact amount you can borrow would usually be based on an assessment of you and your company’s operating performance, both present and projected.
Most lenders will determine whether the mortgage is workable and affordable based on earnings before interest, tax, depreciation, and amortization (EBITDA). The borrower would need to show that the business is profitable enough to cover the mortgage and interest payments to simplify this statement.
However, there is no absolute rule on how much you will be able to borrow based on EBITDA figures. The deal you are offered would usually be adapted, custom-made to you and your business.
Suppose the business that the loan is supporting is deemed not profitable enough to cover the mortgage payments based on adjusted net profit. In that case, some lenders will allow you to declare other legal forms of income and include them in their affordability models.
How do I get a commercial mortgage quote?
There are many online commercial mortgage calculators and rates tables that give commercial mortgage quotes. These tools can be used to show you a very rough idea of the amount you could borrow, but they are not the best way to get a good loan projection. Speaking to a commercial mortgage broker is a better choice as they will take your needs and circumstances into account and use these to generate a range of personalized mortgage quotes for you.
You will not need any online commercial mortgage calculator if you have a reliable commercial mortgage broker. These brokers know exactly how every commercial lender calculates affordability and will factor this in when rounding up the best quotes for you. Your broker will also ensure that you are matched with the mortgage lender best positioned to give you the most generous amount you can borrow and the rates they will offer you.
Do I need a deposit for a commercial mortgage?
Yes. Most commercial mortgage lenders will ask for between 20 and 40 percent deposit as the highest loan to value (LTV) ratio you will likely find 85 percent. But the key for most business owners lies in negotiating the smallest possible deposit and the largest possible loan.
The amount of deposit you can expect to pay is affected by factors like the type of commercial property you are buying (restaurant, hotel, pub, apartment, office building, etc.).
The lender will determine what they believe you can afford to borrow. If they are not sure you can pay larger loan amounts after checking your credit history and balance sheets, a smaller loan amount will be offered. This means that a higher percentage will need to be paid as a deposit.
Most businesses are required to pay a deposit. It might be possible to negotiate a lower deposit. Having an expert commercial mortgage broker can help you negotiate the difficulties of the commercial mortgage process and ensure the right information is provided to access the best deals, including negotiating smaller deposits on your application.
What are the latest commercial mortgage rates?
The interest rate of your commercial mortgage depends on several factors. The main considerations in pricing an application are the following:
- Loan size
- The length and quality of the tenant and lease (for investment properties)
- The type of lender
- The loan to value ratio (LTV)
- Your credit history
- The financials/strength of the business
If your business is well-established and affordability comfortable, you will generally get a lower interest rate. If you plan to use the real estate property as premises for your own business, the interest rate will likely be lower than if you intend to have the property leased.
Owner-occupied commercial mortgage rates can vary from around 2% to 12%. Most loans come in between 2.35% and 6.5%. In general, the higher the deemed risk of the loan, the higher the interest rate charged.
Are there additional costs and fees?
When it comes to commercial mortgage loans, there are typical fees associated with arranging to finance. Listed below are the most common expenses you must consider when applying for financing for your commercial property.
- Appraisal of Commercial Real Estate Property (Starting at $1,500.00)
Commercial real estate dealings require appraisals to determine the true value of the commercial property. An appraiser will write a report that can establish the selling price of a particular property.
- Environmental Phase 1 (Starting at $2,500.00)
An environmental site assessment (ESA) is a report prepared for a real estate holding that identifies potential or existing environmental contamination liabilities. The analysis usually addresses both the underlying land as well as physical improvements to the property. Generally, the Phase I ESA is most considered the beginning of due diligence of the environment.
- Environmental Phase 2 (Starting at $5,000.00)
The main reason why a Phase II Environmental Site Assessment (ESA) is done is to define the nature and level of contamination that may lead to environmental risks associated with the property’s location. If contamination is discovered during the Environmental Phase, I study, then an Environmental Phase II is required. A Phase II ESA is done by making a thorough and intrusive investigation.
- Legal Fees (Starting at $3,500.00)
Legal fees include fees for the professional services provided by your lawyer or notary, who are responsible for conducting a title search, drafting the title deed, and preparing the mortgage, as well as registration fees and other disbursements.
- Lender Fees (Variable)
This is paid to the commercial mortgage lender or bank for arranging the finance. This will either be added to the overall loan or deducted from the loan at completion. This fee is determined based on how complex the transaction is, the time to arrange to finance, and the overall risk of the commercial real estate property.
- Broker Fees (Variable)
A professional commercial mortgage broker will also ask for a fee for their time to locate the best financing solutions for you. This fee is due on successful receipt of a formal mortgage offer and acceptance from the commercial mortgage lender.
Knowing that commercial mortgage affordability is sophisticated and is calculated differently across lenders, you must look for professional advice before approaching a mortgage lender. Online commercial mortgage calculators would not help you very much in this area, as these tools could only give you a rough estimate of your affordability that might not even be in line with what an actual lender is prepared to offer.
The best way to get a true picture of the amount you can borrow is to speak to a trusted professional commercial mortgage broker. These people know exactly how every business lender on the market calculates the amount their clients can borrow, so they can give you a personalized range of quotes and help you choose the best offer.
For More Information, Contact:
John (Adam) Watson, CEO, CanCap Mortgage Group Inc.
Email: email@example.com Tel: 416-452-5281