How Much Deposit Do I Need for a Commercial Mortgage?

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Whether you're an entrepreneur eyeing a new office space, an investor seeking to expand your property portfolio, or a business owner looking to acquire a commercial property, the first step to navigating the world of commercial real estate often involves securing a commercial mortgage.

Getting a commercial mortgage in Ontario comes with several requirements. One of those requirements is a large deposit, also known as a down payment. Unlike residential mortgages, where the deposit percentage is more standardized, commercial mortgages can vary significantly in their down payment requirements. A number of factors can play into your final deposit requirements, from lender-specific criteria to personal financial standing. Through this guide, we hope to empower you to make informed decisions, effectively strategize, and navigate the commercial real estate financing landscape more confidently.

What is a Commercial Mortgage?

A commercial mortgage is a type of loan specifically designed for financing commercial properties or business real estate. It differs from a residential mortgage, which is used to purchase or refinance homes or residential properties. Commercial mortgages are typically used to acquire, develop, or refinance properties intended for business purposes, such as office buildings, retail spaces, warehouses, industrial facilities, apartment buildings with five or more units, hotels, and other income-producing properties.

These mortgages often have different terms and conditions compared to residential mortgages. They might have higher interest rates, shorter repayment periods, larger down payment requirements, and stricter eligibility criteria due to the higher risk associated with commercial properties. Lenders assess various factors, including the property's value, income potential, the borrower's creditworthiness, business plan, and financial history, when determining eligibility and loan terms for a commercial mortgage.

In 2023, the number of new multifamily mortgages increased by 7.1% since last year, while the number of non-residential commercial mortgages increased 5.2% YOY (year-over-year). Over 75% of all commercial mortgages are held by banks, insurance companies, and asset management firms, but many smaller investors participate in the commercial real estate space.

What are the Normal Commercial Mortgage Deposit Requirements?

Commercial mortgage deposits (down payments) in Ontario normally range from 0% (for owner occupied properties) to 50%. For a non-owner occupied property, the percent of down payment needed is directly correlated to the actual rent or market rent a property can generate. This directly determines how much a bank will lender based on your debt service coverage ratio.

One way to reduce your deposit requirements is to opt into CMHC insurance. Canada Mortgage and Housing Corporation (CMHC) is Canada’s provider of mortgage loan insurance for the construction, purchase and refinancing of multi-unit commercial real estate properties, including rental buildings, licensed care facilities and retirement homes. CMHC insured commercial mortgage borrowers will also be offered the best rates given the low risk to lenders, and can qualify for a 15% deposit. 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.

Factors Affecting Deposit Requirements

Lenders use a more complex set of factors when assessing borrowers for commercial loans. These are the most important aspects of their assessment.

Loan-to-Value Ratio

Your property’s loan-to-value ratio is the mortgage amount divided by the lender-assessed value of the property. Very high ratios of over 75% are considered risky by most lenders and will not be approved if the property is not more than 50% owner occupied. An exception to this rule is CHMC-insured properties, which can have an LTV ratio of up to 85%. For additional context, CHMC-insured residential properties can have an LTV ratio of up to 95%.

Lenders typically have an LTV threshold that they use as a limit. If you surpass it, they will not consider lending to you.

Business Credit

A business credit report will give you a thorough outline of your business’s credit history. You can get a report from one of the major credit bureaus.

Canadian business credit reports contain business identification details, including the years your business has been on file. They also include your predictive risk score. Like a personal credit score, business predictive risk scores put a number to the apparent health of your business for the next year.

Of course, business credit scores contain the history of your business’s credit payments and financial history. This includes your business’s current lines of credit or any other kind of outstanding debt.

Current Financials

For properties that will be owner occupied, lenders will assess your current business income against the size of the mortgage you’re looking for. Your business’s income will also be compared against your business debt.

Businesses that have been running for longer and produce more steady income will be viewed more favourably. You will normally have to provide your business’s projections and income statements to commercial mortgage lenders. Some lenders will also insist on a minimum annual income alongside their debt level requirements. They normally favour liquid funds and not equity.

For non-owner occupied properties, lenders will look at the financials for the company that owns the property to determine the gross and net rents generated by the property.

Debt-Service Coverage Ratio

A DSC (debt-service coverage) ratio is one of the metrics used to cover a property’s ability to pay back a loan based on its net income. This ratio gives you the maximum amount that you can borrow, each lender has different criteria based on the location, use, and occupancy of the property. A DSC ratio of 1 means that your building is 100% capable of servicing all debt. While requirements can vary between lenders, most prefer a ratio of at least 1.25.

Business Type

Commercial mortgage lenders view different business types with varying degrees of risk. The type of property is similarly considered. Some traditional lenders won’t provide commercial mortgages for certain property uses as well. Office buildings may have different guidelines than retail spaces, warehouses may have different standards than apartment buildings, etc. The logistics of your mortgage application will depend greatly on your lender’s unique requirements for each property type.

How to Apply for a Commercial Mortgage

Applying for a commercial mortgage is, for the most part, very similar to applying for a residential mortgage. Here is a simple step-by-step guide to making the most of your process:

  1. Prepare Your Financial Information: The first step is to gather and organize your financial documents. This typically includes business financial statements, tax returns, profit and loss statements, balance sheets, bank statements, and any other relevant financial documents.
  2. Understand Your Property Needs: Clearly define your commercial property requirements, including the type of property, location, size, and purpose. Have a business plan or rationale for the property purchase or refinance.
  3. Research Lenders: Identify potential lenders who specialize in commercial mortgages. Banks, credit unions, commercial mortgage brokers, and private lenders are common options. Research their terms, interest rates, fees, and requirements. Contact lenders to discuss your financing needs and inquire about their lending criteria, interest rates, loan terms, and down payment requirements for the type of property you're interested in.
  4. Complete the Application: Once you've chosen a lender, complete their application form. Be prepared to provide detailed information about the property, your business, financial history, credit history, and personal information.
  5. Property Appraisal and Due Diligence: The lender will likely conduct an appraisal of the property to assess its value. They may also perform due diligence on your business and financial standing.
  6. Negotiate Terms: Review the terms proposed by the lender, including interest rates, loan amount, repayment schedule, and any additional fees. Negotiate terms if necessary to ensure they align with your financial capabilities.
  7. Loan Approval and Closing: If your application is approved, review and sign the loan documents. Ensure you understand all terms and conditions before closing the loan. Pay attention to any fees, prepayment penalties, or other clauses.
  8. Fulfill Conditions and Close: Meet any remaining conditions set by the lender, such as insurance requirements or additional documentation. Once all conditions are met, the loan can be closed, and funds will be disbursed.

Improving Your Chances

After considering the above factors, lenders will tell you exactly how much deposit would be required for a commercial loan from them. By taking certain actions, such as increasing your business’s income and debt ratios, you may be able to qualify for a smaller down payment.

Lender’s decisions are always based on perceived risk. You may be able to get a better deal by shopping around and negotiating for lower deposit requirements.

To find out your current situation, Clover Mortgage can provide you with a fast, free mortgage quote. Contact us now to get a no-obligation mortgage quote and consultation.

How to get a Commercial Mortgage in Ontario

You can start shopping for commercial mortgages today. By comparing different rates and lenders, you can save money. You can also shop around for deposit requirements that are suitable for your business.

Clover Mortgage can help you find a commercial mortgage you can work with. Clover Mortgage makes it easy for our clients to get approved for commercial mortgages. We regularly help our clients apply and get approved for commercial mortgages as small as $500,000 or over $100 million. Given the complexity of the commercial mortgage market, having a qualified broker in your corner (that can easily compare and contrast a wide range of mortgage products) can help ensure that you receive the best rates and terms available on the market. Contact us today to find out more about the terms and deposit requirements your business can qualify for.

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