Commercial Mortgages in Ontario
Taking out a Commercial Mortgage in Ontario to purchase or refinance has similarities to financing Residential Real Estate . Commercial Mortgages finance Complexes greater than 4 units , Apartment Buildings, Hotels, Malls, Office buildings, Land, and more. Taking out Commercial Mortgage in Ontario has some steps that differ than a residential mortgage. Take a look at the primary differences:
Organizations and entities take out commercial mortgages more frequently than individuals do.
Most residential mortgages are taken out by individuals financing their home or a rental property. Commercial Mortgage are commonly obtained by Corporations, Limited Partnerships, Hold Companies, and Trusts. The intend use of the Commercial Property varies greatly and is rarely occupied solely by the owner.
Individuals taking out a residential mortgage must meet specific lender criteria which includes a credit check. In the case of entities looking to take out a commercial mortgage in Ontario, they may not have a credit history and lack adequate financial documentation. In those cases, the lenders may require that the entity’s owners to personally guarantee the loan (Personal Guarantor). Guarantor’s are responsible if the loan goes into default. The other, less common, option here is a non-recourse loan, in which the lender does not secure a guaranty from the principals. If the loan goes into default, the only remedy for the lender is to seize the property.
Commercial mortgages frequently have longer amortization periods than the terms of the loan.
The longest term one can find in Canada for a Residential or Commercial Mortgage is ten years. The amortization periods for mortgages generally run between 15 to 30 years. In most cases, a renewal is offered prior to the end of the term. The Offer is generally within 6 months of the maturity date. The Borrower can also refinance the with another lender. The length of the amortization period is linked to the interest rate. The longer the term, the higher the interest rate due to the extended risk.
The loan-to-value (LTV) ratio in a commercial mortgage often has to be lower than it would with a residential mortgage.
The LTV ratio measures the value of a loan in relation to the property’s value. A lender determines a mortgage’s potential LTV ratio by dividing the requested loan amount by the property’s value. A $600,000 loan on a $1,000,000 property has a LTV of 60 percent. The lower the LTV generally results in a lower rate.
Many residential mortgages come with an LTV that can run as high as 95 percent. However, in Ontario, the majority of commercial mortgages cannot have an LTV ratio higher than 75 percent. The most common range runs between 65 and 75 percent. Some special insured and/or government backed programs exceeding 75%. Regarding Raw land the maximum on LTV ratios is often between 40% – 60%.
Lenders also look at debt-service coverage ratio for commercial real estate mortgages.
The debt-service coverage ratio (DSCR) measures a property’s net operating income with respect to the debt that is attached to the property. This calculation includes principal and interest. The purpose of this ratio is to determine whether a particular property can pay for the debt attached to it.
If a property generates $500,000 in NOI (net operating income) per year and has $300,000 debt service; the DSCR would be 1.67. Lenders use this cash flow ratio to determine the maximum size of the loan they should extend for a property.
A DSCR of 1 means that the property brings in exactly enough cash to pay for the loan that the property secures. In Ontario, commercial lenders often require a DSCR that is at least 1.25, so that the cash value will continue to cover the demands of the loan. There may be flexibility for borrowers willing to take shorter amortization periods or in the case of properties that have stable, high cash flows. In the case of a property that has an unstable cash flow, the ratio requirement could be higher.
Commercial mortgages often come with higher interest rates.
This is an acknowledgment of the simple fact that the risk with a commercial mortgage is higher, even after accounting for the lower LTV ratios. The principals making the guaranty for the mortgage would allow the commercial loan to lapse before they would put their residential mortgage in jeopardy – making the risk higher.
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