Getting a commercial mortgage in Ontario comes with several requirements. One of those requirements is a large deposit. Exact deposit requirements may vary according to several variables. However, most deposit requirements fall under the same range.
Let’s look over how commercial mortgages work and what Canadians are paying towards commercial mortgage deposits. Then, we will go over what you can do to end up depositing less.
What is a Commercial Mortgage?
A commercial mortgage is a mortgage secured with commercial real estate. That means the mortgage is taken with the property as collateral.
Commercial mortgages stand apart from residential mortgages in a few ways. The buyer of commercial real estate is normally a corporation. Typical commercial mortgage borrowers are partnerships, limited companies, or corporations.
Differences vs Residential Mortgages
One of the main differences between commercial and residential mortgages is the level of risk. From a lender’s point of view, a commercial mortgage is riskier than a residential mortgage. The assessment process for a commercial loan is also more complicated.
The reasons why commercial mortgages are riskier to lenders are:
- Corporate responsibility vs individual or family responsibility
- Difficulty assessing creditworthiness and potential risk
- Different income history assessments
- Repayment is dependent on complex business performance, not fixed employee incomes
This risk and complexity have several implications for commercial mortgage borrowers. The most significant is that to accommodate the risk, lenders charge significantly higher rates. In addition, the mortgage will require a significant deposit.
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 it 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.
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.
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.
Lenders typically have an LTV threshold that they use as a limit. If you surpass it, they will not consider lending to you.
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.
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
This 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.
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.
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. Contact us today to find out more about the terms and deposit requirements your business can qualify for.