Most Canadians are familiar with residential mortgages. After all, homeownership is something most people aspire to, so the ins and outs of home loans and mortgage rates tend to reveal themselves to consumers as they take their first steps toward purchasing a property. However, unless an individual is a business owner or investor, they might not understand the intricacies of commercial mortgages.
What is a commercial mortgage?
Put simply, a commercial mortgage is a loan for real estate that is used for business. Whereas a person's house or condominium may require a residential mortgage, commercial mortgages are used for properties that are used for office space, retail, manufacturing and other non-residential services.
Just as with residential mortgages, commercial mortgages come in many shapes and sizes. Traditional commercial mortgages can be both adjustable-rate and fixed-rate. While adjustable-rate commercial mortgages can be riskier for borrowers, they can also make it easier to qualify for a larger loan amount.
Commercial mortgages can also come in the form of interest-only loans. These types of mortgages can be made available to borrowers who are able to show that a property's future profits will grow over time. Interest-only commercial mortgages make is possible to make much smaller monthly payments on the loan for a specific period of time.
Additionally, borrowers can also take out second mortgages when it comes to commercial loans. When a borrower or business investor is in need of funds, taking out a commercial second mortgage can be a good way to obtain money quickly.
Besides traditional commercial mortgages, there are other financing options when it comes to commercial real estate. These include bridge loans, land development loans and other options.
Bridge loans give borrowers an influx of cash to tide them over until a more long-term financing solution is completed. Business owners who are first starting out or are waiting on other financing to come through may find themselves in need of fast cash, making bridge loans a valuable tool. They act as a bridge between a business' immediate monetary needs and long-term financing, hence their name. However, borrowers should keep in mind that bridge loans are only temporary solutions. Additionally, these types of loans typically feature stricter qualifying standards, including for credit and proof of income. Bridge loans also tend to have higher fees than other commercial loans due to their quick availability.
Land development loans
Whereas traditional commercial mortgages are used to purchase property, land development loans are used to change a commercial property for a specific intent. Any real estate that requires renovations or remodeling work will require funds, and land development loans give borrowers the money they need to make changes and upgrades to existing real estate. For instance, if a business that was previously used for retail space needs to be converted into a restaurant, land development loans can be used to pay for the changes. These loans can also be used to generally improve a property to make it more attractive to customers or tenants, as well as make a property more environmentally-friendly. Additionally, these types of loans can be used to improve the value of a property, making it easier to obtain a higher asking price upon its sale.
These types of mortgages are unique to commercial lending, as they require a property to generate income. Participating loans are mortgages that allow lenders to share in a property's profits. Since a lender will receive some portion of a property's profits, in addition to monthly payments and interest, these loans can make it easier for borrowers to obtain financing.