Commercial Mortgages
What You Should Know
- Commercial mortgages are typically used for income-generating properties with more than four units.
- Commercial mortgage rates are higher than residential mortgage rates but lower than construction loans.
- Lenders assess the property’s income-generating potential and the borrower’s financials.
- Most commercial lenders can provide you with a maximum loan-to-value (LTV) of 85% with a 25-year amortization.
- However, CMHC-insured commercial mortgages can have an amortization period of up to 40 years.
| COMMERCIAL | RESIDENTIAL | |
|---|---|---|
| MEANT FOR | Large real estate investment corporations | Standard homebuyers, Small real estate investors |
| MORTGAGE RATE | Higher | Lower |
| RATE BENCHMARK | Bank of Canada 5-year bond | Bank of Canada overnight rate |
| MAXIMUM LTV | 85% | 95% |
| MAXIMUM AMORTIZATION | 40 Years | 25 Years |
| CMHC AVAILABILITY | ✅ | ✅ |
| QUALIFICATION CRITERIA | Property income generation, Borrower's financials | Borrower's financials |
Commercial Mortgage Rates
Commercial mortgages are a type of investment property mortgage. However, the rates are highly dependent on the specific mortgage, property, and borrower conditions. For example, mortgages on stabilized properties with well-funded and reputable borrowers will get better rates than riskier mortgages on pre-construction condo developers with a short history.
However, all commercial mortgages are typically based on BBB corporate bonds of the same timeframe. Mortgage lenders then add on a premium based on the riskiness of the commercial loan. Higher-risk borrowers must pay a higher premium, while rates for low-risk borrowers will be closer to the BBB corporate bond yield. However, these rates tend to be higher than CMHC-insured commercial rates, which are the lowest risk to lenders. You can use a commercial mortgage calculator to see how a change in interest rates will affect your mortgage payments.
CMHC-insured commercial mortgage rates
The Canada Mortgage and Housing Corporation (CMHC) also provides default insurance to commercial mortgages. This protects the mortgage lenders because CMHC will pay the lender if the commercial borrower defaults on the mortgage.
CMHC insured commercial mortgage borrowers are offered the best rates given the low risk to lenders. However, unlike conventional commercial mortgages, which benchmark mortgage rates to the BBB corporate yield, CMHC mortgages are tied to the Canadian Mortgage Bond (CMB) Yield.
The CMB yield (shown as the orange numbers below) is generally 1% - 1.5% higher than the 5-Year Government of Canada (GOC) Bond Yield (shown as the blue line below). Additionally, your mortgage lender will charge a premium on top of the CMB yield, depending on your risk factor. The premium ranges between 0.4% - 2%. This means a CMHC mortgage rate is generally 1.4% - 3.5% higher than the 5-year GOC bond yield.
Canadian Mortgage Bond Yield History
On top of the mortgage rate, you will need to pay for CMHC mortgage default insurance to purchase a commercial property with a CMHC-insured commercial mortgage. The additional rates are below for standard market-rate rentals and affordable housing initiatives.
| Max loan-to-value | CMHC premium for market-rate rentals | CMHC premium for affordable housing rentals |
|---|---|---|
| 65% | 1.75% | 1.50% |
| 70% | 2.00% | 1.60% |
| 75% | 2.50% | 1.70% |
| 80% | 3.50% | 1.85% |
| 85% | 4.50% | 2.05% |
To qualify for a CMHC insured commercial mortgage for standard rental housing, you must meet the following criteria:
- The building must have at least five rental units
- At least 70% of the floor area and loan value must be residential units
- Have a maximum LTV of 85%
- You must have proven the ability in managing a similar size building
- Have at least five years of property management experience (or a reputable property manager)
- Your net worth must exceed 25% of the loan value
- The ability to guarantee the total loan value until you have 12 straight months of stable rents
What is a Commercial Mortgage?
A commercial mortgage is any mortgage for commercial property, including multi-family rental apartments, office buildings, retail spaces, industrial buildings, hotels, and more. While the available mortgage terms are similar to residential mortgages, they usually have higher interest rates and take more time to process due to the complexity of appraising the underlying property. In addition, they take into account the expected cash flow of the property (e.g. rent) and the borrower’s history.
Commercial Mortgage Terms
There are many different commercial mortgages for the different kinds of properties and use-cases. Due to the size and complexity of commercial mortgages and the difficulty of selling commercial properties, the specific terms of a commercial mortgage will differ from case to case. However, generally speaking most commercial mortgages for developed properties like multi-residential, retail, office, and hospitality share the following terms:
| Rate Types | Fixed, Variable, or Combined Rate |
|---|---|
| Loan-to-value (LTV) | Up to 85% |
| Term length | 1 to 25 years |
| Amortization | Up to 25 years (CMHC: Up to 40 years) |
Term Lengths
Commercial mortgage terms can range between 1 and 25 years. Typically the terms range between 5 and 20 years. Anything less than five years is bridge financing. Commercial mortgage borrowers prefer to lock in a long-term mortgage when interest rates are low. However, if rates are expected to drop soon, they might opt for a shorter-term loan.
Loan-to-Value (LTV)
Commercial mortgages usually have a loan-to-value of up to 85% depending on the property type. Farmland or vacant lots can be restricted to an LTV of as low as 50%. In contrast, residential mortgages can have an LTV of up to 95%. The lower LTV is due in part to three reasons:
- No mortgage insurance means the lender has to take on the full risk of the mortgage for higher LTVs.
- Borrowers will usually rely on cashflow from their property to make payments for the mortgage. If something happens to the property, both the value of the property and the borrower's ability to pay will be affected.
- A less active and transparent market for commercial properties can mean valuations are only a "best guess". Some property types such as rural lots are even more difficult to appraise, making it necessary for the lender to build in a valuation buffer.
Commercial Mortgage Broker
A commercial mortgage broker in Canada can help you find the best mortgage for your needs. Additionally, they can assist you with the complicated process of obtaining a mortgage. For example, they'll assist you with submitting paperwork like page-long environmental reports and building condition reports.
A mortgage broker works with large banks, trust companies, and credit unions in Canada to find the best deal for you. With their experience in the mortgage industry, they may help you quickly find a mortgage with lower interest rates than you could individually.
Commercial Mortgage Lenders
First National Commercial Mortgages
First National offers commercial mortgages for purchases, new constructions and refinancing/second mortgages. First National classifies their mortgages into two main offerings: First Mortgage Financing and Top-up Financing and Second Mortgages. You can learn more about First National’s mortgage rate and reviews here.
First Mortgage Financing
First National offers First Mortgage Financing for mortgage loans between $2.5 million and $10 million for properties in major population centres in Canada. 1 to 5 year terms are offered with an amortization of up to 25 years. Maximum LTV is 75%.
Top-up Financing and Second Mortgages
First National offers Top-up Financing and Second Mortgages for mortgage loans between $1 million and $10 million for properties in major population centres in Canada. 1 to 5 year terms are offered with an amortization of up to 25 years. Maximum LTV is 85%. An interest-only option is also available.
| 1st Mortgage | 2nd Mortgage/ Top-Up | |
|---|---|---|
| Loan Amount | $2.5M to $10M | $1M to $10M |
| Loan-to-Value (LTV) | Up to 75% | Up to 85% |
| Term Length | Up to 5 Years | Up to 5 Years |
| Amortization | Up to 25 Years | Up to 25 Years (Interest-only Option Available) |
| Eligible Property Classes | Multi-family, Retail/plaza, Office, Mixed-use, Industrial, and Hospitality | Top-up: Multi-Family, Retirement HomesSecond Mortgage: Retail/Plaza, Office, Mixed-Use, Industrial, Hospitality |
| Eligible Mortgage Type | First Mortgage Only | Second Mortgage, Top-up |
| Eligible Regions | Major Population Centres | Major Population Centres |
MCAP Commercial Mortgages
MCAP offers commercial mortgages for new purchases, refinancing, and top-up/second mortgages for loan terms of 1-5 years and an amortization of up to 25 years. They also offer specialized CMHC mortgages for multi-family and retirement homes with amortization of up to 40 years. We have a guide on MCAP mortgage rates and reviews to help you learn more.
CMHC Insured Commercial Mortgages
MCAP is one of Canada's largest originators of CMHC mortgages on multi-family properties, retirement homes, and affordable housing projects.
Conventional Commercial Mortgages
MCAP also offers conventional commercial mortgage loans to its clients for a variety of different property types.
| CMHC Insured | Conventional 1st Mortgage | Conventional 2nd Mortgage/ Top-Up | |
|---|---|---|---|
| Loan Amount | $2.0M to $100M | $2.5M to $10M | $1M to $10M |
| Loan-to-Value (LTV) | Up to 85% | Up to 75% | Up to 85% |
| Term Length | 5 - 10 Years | 1 - 5 Years | 1 - 5 Years |
| Amortization | Up to 40 Years (Premium Charged for>25 Years) | Up to 25 Years | Up to 25 Years (Interest-only Option Available) |
| Eligible Mortgage Type | First Mortgage, Second Mortgage, Pari Passu Mortgages, Top-ups | First Mortgage Only | Second Mortgage, Top-up |
| Eligible Property Classes | Multi-Family. Retirement Homes, Student Housing, Social Housing, Affordable Housing Projects | Multi-Family, Retail/Plaza, Office, Mixed-use, Industrial, Hospitality | Top-up: Multi-Family, Retirement HomesSecond Mortgage: Retail/Plaza, Office, Mixed-Use, Industrial, Hospitality |
| Eligible Regions | BC, AB, SK, MB, ON, QC, NS, NB | Major Population Centres | Major Population Centres |
CMLS Financial Commercial Mortgages
CMLS Financial offers commercial mortgages for both purchases and new constructions with a mortgage term of 1 to 25 years and an amortization of up to 30 years. Fixed, variable, and combination rates are offered. According to our CMLS mortgage rates and reviews guide, the lender has originated over $5 billion of mortgages.
Conventional Term
CMLS Conventional Term commercial mortgages are offered for most property types. 1 to 25 year terms are offered with an amortization of up to 30 years. Recourse and non-recourse loan options are available. Other features include interest-only periods and a forward rate fix.
Small Loans Program
CMLS offers a Small Loans Program for commercial mortgages from $500,000 to $5,000,000. It is a first-mortgage program open to all property types.
| Loan Amount | $500K to $5M |
|---|---|
| Loan-to-Value (LTV) | Up to 85% |
| Term Length | 5 and 10 Years |
| Amortization | Up to 40 Years |
| Eligible Property Classes | All Properties Considered (Including Land) |
| Eligible Mortgage Type | First Mortgage, Second Mortgage, Pari Passu Mortgages, Top-ups |
| Eligible Regions | All Regions Considered |
CIBC Commercial Mortgages
CIBC offers competitive first mortgage commercial mortgages ranging from $1M to $40M for multi-unit residential, retail plazas and centres, office buildings and medical centres, as well as industrial buildings. As one of Canada’s largest banks, CIBC is known for their mortgage rates and reviews.
| Loan Amount | $1M to $40M |
|---|---|
| Loan-to-Value (LTV) | Up to 85% |
| Term Length | Up to 10 Years |
| Eligible Property Classes | Multi-unit Residential, Retail Plazas, Offices, Medical Centres, Industrial |
| Eligible Mortgage Type | First Mortgage Only |
Desjardins Bank Commercial Mortgages
Desjardins Bank offers commercial mortgages for both purchases and new constructions with a mortgage term of 1 to 10 years and an amortization of up to 20 years. Residential rental properties can have an amortization of up to 25 years. Fixed, variable, and combination rates are offered. Desjardins is the largest credit union in North America, you can learn more about them in our article about Desjardins mortgage rates and reviews.
Multiproject Option
Desjardin's Multiproject Option is a "reusable" mortgage loan where some or all of the principal can be withdrawn for another project. This allows you to use a single loan contract for multiple projects.
Managed-Rate Option
Desjardin's Managed-Rate Option allows you to split a term or mortgage loans into up to three independent loans, each with their own rates, terms, and amortization periods. Total amortization can be up to 25 years with each loan having a term of up to 10 years. Fixed, variable, and combination rates are offered.
The Bottom Line
Overall, commercial mortgages are the best option for real estate investors in Canada. Although the mortgage rate is higher, you can amortize the payments over a longer period. This provides you with more cash flow as your monthly mortgage payments are lower. As a result, your return on investment will be higher. Additionally, you can meet the debt service ratios with the future income you will receive from the acquisition.