Applying for a commercial mortgage in Canada is not just about acquiring funds for a property you found. It is also about doing a lot of research to know if you have found a “commercial” property and getting the right kind of loan for it. There are as many types of commercial real estate as there are mortgages, so it is easy and understandable for you to get confused. 

To help you out some, we have gathered vital information that will explain the types of commercial real estate loans and commercial real estate out there. Remember that when you are armed with knowledge, you have the tool to make the kind of decisions that will lead to success.

Kinds of Commercial Real Estate

Before discussing the different kinds of commercial mortgages in Canada, you need to check first if the property you are interested in is indeed “commercial.” Commercial real estate can be a piece of land or any structure or building that can be utilized for income generation. Below are several of them:

Hotels and Resorts

This category is as broad as it gets and can include inns, motels, casinos, luxury resorts, full-service hotels, and corporate chains.

Warehouses and Other Industrial Facilities

This type of property may be used for light assembly or heavy manufacturing or to handle bulk and small storage of goods. 

Medical Facilities

Hospitals are included in this category, surgical centers, doctor’s offices, nursing homes, and clinics for urgent care.

Retail Buildings

These can be as large as a regional mall or a strip mall or as small as a stand-alone shop that sells goods. 

Office Buildings

Expect an office building located in the heart of a commercial district to be more expensive and sought after than one farther away.

Mixed-Use Buildings

A combination of commercial and residential, these properties have storefronts on the ground floor or first two floors and apartments or condominiums on the other floors. 

Residential Buildings

Condominiums, townhomes, and apartments can only be categorized as commercial if their units are five or more. 

Types of Commercial Real Estate Loans

Now that you have looked at the kinds of commercial properties, you can already ascertain which category your property falls under. So, the next step would be to know what kind of commercial mortgage in Canada best suits your requirements.

Simply put, commercial mortgages are loans that use commercial properties as collateral. You will have more success as a borrower if you belong to a partnership, company, or corporation. As this transaction involves more regulations and paperwork than residential loans, you have to expect a higher processing time to take as long as a year. Also, you need to understand that each type of loan will have different uses, terms, and rates.

What follows are the different types of commercial real estate loans you might like to know more about:

Long-term with Fixed Interest Loan

This is the standard loan for commercial real estate and works the same as a home mortgage, although with shorter terms and broader uses. It is rare for real estate loans to go beyond 20 years, and they are usually payable within 5 to 10 years. They also require a high credit score, an occupancy of 51% of the commercial property, and a minimum of one year in business. Interest rates for these loans are usually between 4% and 7% for variable-rate mortgages. Those with fixed rates will have to deal with the same terms and rates throughout the loan period. 

Refinance Loan

This type of commercial mortgage in Canada is a way for you to avail of lower interest rates. Although refinancing your initial loan involves additional costs and fees, these are just minimal and lesser than the total savings you’ll get from lower monthly payments and a cumulative debt that is smaller in amount. Refinancing is a big help in the expansion or improvement of properties, which can augment profit flow. It can also aid in paying off such expenses as the last payment of an interest-only mortgage.

Interest-Only Payment Loan

Otherwise known as a balloon loan, an interest-only payment loan is good for a business anticipating a huge payout soon instead of a stable stream of money per month, especially at the start. Payments for this kind of loan are usually made on the amount with the smaller interest. However, at the end of the term, which falls between three and seven years, you would have to pay the full or “balloon” amount. 

Business owners who are still constructing their commercial properties usually avail of this type of commercial mortgage in Canada. However, they typically refinance the balloon amount when it is almost time to pay up. 

Cash-Out Loan

Financing or refinancing a commercial mortgage option involves paying off a property’s equity by taking out a previous loan. It could also be cashing out a property’s equity even without a mortgage. Borrowers usually avail of a cash-out loan if they want to make improvements to their properties. This is especially true for those who own multi-family rental units. The thinking that comes with this is that once the upgrades are completed, they will charge higher rent, thus increasing profits.

Hard Money Loan

Unlike most financing options, this kind of loan comes solely from private investors ready to take risks in lending out money based not on a borrower’s credit worth but a property’s value. However, this comes with a shorter term of just 6 to 24 months and higher interest rates from 10% to 18%. On top of all these, you will also need to pay bigger upfront fees.

Blanket Loan

This kind of commercial mortgage in Canada offers larger corporations the flexibility and convenience needed to manage multiple properties. It allows them to place everything under one financing arrangement. Selling two out of ten properties under a blanket loan can be done without suffering from penalties. Profits from the sale can then be used as an investment elsewhere. Although the increased investment options and reduced paperwork for blanket loans are appealing, it has its disadvantages. They are not just complicated to avail of but also come with sizable payments and considerable default penalties.

Bridge Loan

A softer form of a hard loan, a bridge loan, is payable for up to three years, has interest rates of 6.5% to 9%, and only takes 15 to 45 days of waiting from approval to funding. To qualify for this loan, you will need a minimum credit score of 650 and the ability to pay a 10% to 20% deposit. Short-term investors favor getting bridge loans for construction or renovations before they take out a refinance loan that is more comprehensive and offers a larger amount.

Fix-and-Flip Loan

Large and small investors prefer to use this kind of commercial mortgage in Canada for property development, especially if they intend to sell the property once it is done. This financing option is the same as a bridge loan because it allows business owners to cover the incurred shortfall while waiting for a longer-term loan option.

Construction Loan

As the loan name suggests, borrowers use this loan to cover the expenses for constructing or developing commercial structures like fulfillment centers, multi-family residential units for rent, warehouses, retail complexes, and offices. If you have already bought the land you will build your building on; it could be collateral for a construction loan. Building materials and equipment can be used as collateral as well. Payment terms for this mortgage type can run from 18 to 36 months and usually lead into one with a longer term.

As you can see, there are various types of commercial real estate loans available that are ideal for your innumerable needs as an investor. You have to learn about them to understand how each works, especially regarding usage, terms, and interest rates. Whether you require funds to buy a property, construct a building, or improve an existing structure, a commercial mortgage in Canada will answer all your needs. 

For More Information, Contact:

John (Adam) Watson, CEO, CanCap Mortgage Group Inc. 

Email:   Tel: 416-452-5281