Commercial Mortgages
What You Should Know
- 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.
- Non-residential commercial mortgages may reach 70% of the property value while commercial mortgages for multi-family properties may reach 75% of the appraised value. With mortgage default insurance, maximum loan-to-value (LTV) can be as high as 85%.
Commercial Residential vs. Homeowner Mortgages
| Commercial Residential | Homeowner | |
|---|---|---|
| MEANT FOR | Large real estate investment corporations | Standard homebuyers, Small real estate investors |
| MORTGAGE RATE | Higher | Lower |
| MAXIMUM LTV | 85% | 95% |
| MAXIMUM AMORTIZATION | 40 Years | 25 Years |
| CMHC AVAILABILITY | ✅ | ✅ |
| QUALIFICATION CRITERIA | Property income generation, Borrower's financials | Borrower's financials |
A commercial mortgage is a mortgage offered against the security of a commercial property. Commercial property can be a warehouse, mall, office building, medical centre, retail store or multifamily residential. In summary, any real property other than houses is commercial real estate.
The border between commercial and non-commercial is not universally defined in residential buildings. CMHC considers any building with four or fewer units as a house which qualifies for a homeowner mortgage. Buildings with five or more units qualify for rental housing mortgage. RBC considers buildings with six or fewer units eligible for a conventional mortgage, while those with seven or more units are considered for a commercial mortgage.
There are two main differences between a conventional mortgage and a commercial mortgage. The first difference is that a lender extends a conventional mortgage based on the borrower's ability and willingness to repay his loan. In contrast, a lender extends a commercial mortgage based on the property's ability to generate free cash flow sufficient to service its debt.
So while the main factors determining if you qualify for a homeowner mortgage are your debt service ratios, the main factors determining if you qualify for a commercial mortgage are the debt service ratio (DSR) or debt coverage ratio (DCR) of your future property.
The other main difference between homeowner and commercial mortgages is the collateral. The collateral in homeowner mortgages is often non-specialized. This non-specificity reduces the lender’s and the borrower’s risk, as the house can always be sold to repay the mortgage. For any home, there are many potential purchasers and many potential renters.
Commercial buildings are more specialized, and as a result, they are less liquid. A commercial building may be specifically designed and built for a specific business. As a result, if their tenant leaves, it might take years for another company to rent the place, and very few buyers are interested in buying them (compared with a home).
Illiquidity of commercial properties results in commercial mortgages being of higher risk. The more specialized a commercial property, the higher the risk. So, in general, commercial mortgage rates are higher than conventional mortgage rates. Amongst commercial properties, multi-family buildings are the least risky.
Lenders would decide the mortgage rate and maximum LTV based on their risk tolerance. Thus commercial mortgages have higher rates and lower maximum LTV compared with homeowner mortgages, and among commercial mortgages, those for rental multifamily have lower rates and higher LTV.
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 owned by well-funded and reputable borrowers will get better rates than riskier mortgages on pre-construction condo developments owned by 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 your mortgage rate will affect your mortgage payments.
CMHC-insured commercial mortgage rates
CMHC is Canada’s national housing agency. Its homeowner program insures homeowner mortgages against default to make it easier for Canadians to own their primary residence. It also has a small rental program and a standard rental program. These later programs aim to increase the supply of rental housing by insuring rental mortgages against default.
CMHC insured commercial mortgage borrowers are offered the best rates given the low risk to lenders. This is because, unlike conventional commercial mortgages, which benchmark mortgage rates to the BBB corporate yield, CMHC mortgages are tied to the Canadian Mortgage Bond (CMB) Yield. CMHC guarantees CMBs on behalf of the federal government. So they are some of the safest investments available in Canada.
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:
Common Commercial Mortgage Characteristics
| Rate Types | Fixed, Variable, or Combined Rate |
|---|---|
| Loan-to-value (LTV) | Up to 85% with CMHC default insurance, up to 75% for multi-family residential, up to 65% for other uses. |
| Term length | 1 to 10 years |
| Amortization | Up to 25 years (CMHC: Up to 40 years) |
Term Lengths
Typically, commercial mortgage terms can range between 1 and 10 years. Anything less than a year 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 have a loan-to-value of up to 85% depending on the property type and potential presence of default insurance. 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:
- 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 borrowing option for purchasing or improving real estate investments in Canada. The mortgage rate is higher compared with homeowner mortgages. Commercial mortgage principal and periodic installment payments can be much higher than residential mortgages.
Except for land mortgages and construction financing, commercial mortgages are expected to be paid from the cash flow generated by the underlying property. As a result, the debt coverage ratio or debt service ratio is the primary determinant of commercial mortgage affordability.
Commercial mortgage underwriting is also much more involved than residential mortgage underwriting, as documenting the income of a property is more involved and more complicated than documenting an individual's income.
Further, the risk of a commercial property polluting the environment is much greater than the risk of environmental pollution from a residential home. Thus commercial properties often require an environmental site assessment for the lender to ensure that the property is not burdened with the cost of mitigating environmental contamination.
Commercial mortgages with lower LTV ratios can be structured as non-recourse loans. In contrast, commercial mortgages with higher LTV ratio can require the borrower to pledge additional security before approval.