How to Prepare for a Commercial Mortgage Application in Canada

Applying for a commercial mortgage can feel overwhelming, especially with the unique requirements you’ll encounter in Canada. From understanding down payments and mortgage types to preparing financial assessments, the process requires thorough preparation. Yet, all this effort can lead to the payoff of owning a property that not only meets your business needs but also serves as an asset for your financial future.

Securing a commercial mortgage involves multiple steps, each with its own considerations, and diving into the details early can help you avoid setbacks later. Regardless of the type of property you’re aiming to buy, knowing what’s ahead will make the journey smoother. Here’s a few things you can do to be as prepared as possible to make informed decisions.

Assess Your Financial Health

Building a strong financial foundation is the first and arguably most important step in preparing for a commercial mortgage. Lenders will review several aspects of your finances to evaluate your reliability as a borrower.

Your credit score is one of the primary indicators lenders use to assess your creditworthiness. A score of 680 or higher is ideal, indicating responsible borrowing and timely repayments. Lower scores may be considered, but often come with higher interest rates or additional requirements. If your score is below 680, improve it by paying off debt, making timely payments, and limiting new credit applications before applying for a mortgage.

The DSCR is a financial metric used by lenders to assess a borrower's ability to meet debt obligations. It is calculated by dividing a property's net operating income by total debt payments. A DSCR of 1.25 or higher indicates a comfortable ability to cover debt payments. A lower ratio may indicate difficulty in repayment, making it harder to secure a mortgage. Improving the DSCR can be achieved by increasing net operating income or reducing expenses and debt obligations.

Mortgage approval is heavily influenced by a business's financial health, particularly if the income relies on the property. Lenders typically review financial statements, tax returns, and profit and loss statements from the past two to three years to demonstrate consistent profitability and cash flow stability. Documents to prepare include: 

• Profit and Loss Statements
• Balance Sheet
• Cash Flow Statement
• Tax Returns. 

These documents help lenders understand the business's financial standing, demonstrate liquidity, and provide a reliable snapshot of past performance. These documents help lenders verify revenue figures and profit margins, ensuring the business's ability to manage mortgage payments.

If a mortgage is for a property that generates income, lenders may require a financial plan detailing projected income, expected operating costs, and payment coverage. The plan should provide conservative estimates based on market rates and demonstrate the property's cash flow can support debt obligations.

Being organized with your documentation can help streamline the application process and make a positive impression on lenders. Have all financial records readily accessible and ensure that they’re up to date and accurate. For complex financial situations, working with an accountant to prepare clear and comprehensive records can save time and demonstrate professionalism to lenders.

Choose Your Mortgage Product

Not all commercial mortgages are the same! Choosing the right type can significantly affect your loan terms, interest rates, and overall financial commitment.

Conventional commercial mortgages are popular options for businesses with a strong financial history. They work best for established businesses with a solid credit history and the ability to make a larger down payment. They are offered by banks, credit unions, and traditional lenders and are ideal for those meeting standard eligibility criteria and seeking predictable terms. However, the stringent qualification requirements mean this option may not be accessible to all borrowers.

• Loan-to-Value (LTV): Up to 75% of the property’s appraised value, meaning you may need a down payment of 25% or more.
• Interest Rates: Generally range between 4% and 6%, providing relatively low and stable payments for qualified borrowers.
• Amortization Period: Typically up to 25 years, giving you a reasonable timeline to repay the loan with manageable monthly payments.

The Canada Mortgage and Housing Corporation (CMHC) provides mortgage insurance for loans on multi-residential properties, reducing lenders' risk and offering more favorable terms. These mortgages are ideal for investors in the rental or multi-family market, but there are fees associated with the insurance and the application process can be more complex due to additional underwriting requirements.

• Ideal For: Multi-residential properties, such as apartment buildings or mixed-use properties with residential components.
• LTV: Higher than conventional options, with up to 85% financing available, reducing the amount you need for a down payment.
• Interest Rates: Lower than typical commercial rates, often 1-2% below conventional rates, due to the added security of CMHC insurance.
• Amortization Period: Extended options of up to 40 years, which can reduce monthly payments and improve cash flow.

Private commercial mortgages offer a flexible solution for borrowers who don't meet conventional or CMHC-insured loan criteria. They are typically offered by private lenders and can accommodate unique financial situations like poor credit, high-risk properties, or short-term financing needs. However, due to higher interest rates, these loans are often more expensive and used as temporary solutions until borrowers can qualify for a conventional mortgage.

• LTV: Similar to conventional loans, often around 75%, although terms can vary widely depending on the lender and property type.
• Interest Rates: Generally higher, ranging from 6% to 12% due to the increased risk taken on by the private lender.
• Amortization Period: Usually shorter, with terms from 1 to 5 years, making them ideal for short-term financing solutions, bridge loans, or properties in need of redevelopment.

The choice of a commercial mortgage is contingent upon your financial status, property type, and long-term objectives. Assessing your ability to afford a down payment, property type, and credit profile is key for a well-informed decision.

Identify Property Type and Value

The property you plan to finance plays a role in the commercial mortgage process, influencing loan terms and approval chances. Lenders consider the type of property, such as office buildings, retail spaces, or multi-family residential properties, as each type has its own set of considerations. Multi-family buildings are more favorable due to their steady rental income, while retail spaces or office buildings carry more risk. The stability and income-generating capacity of the property are key factors in lenders' assessment of investment risk. A professional appraisal is typically required to determine the loan amount, establishing the property's current market value and condition. This value directly influences the LTV ratio. A professional appraisal not only determines the loan amount but also prevents overpaying, which can jeopardize financial stability and future repayment capacity.

Prepare a Down Payment

Down payments affect the borrower's amount, interest rate, and loan terms. They vary depending on the type of mortgage and lender's requirements. The typical down payment requirements for different types of commercial mortgages are as follows:

Conventional commercial mortgages require a down payment of 25%-35% of the property's purchase price, demonstrating financial stability and risk management. A larger upfront contribution lowers the loan-to-value ratio, resulting in more favorable loan terms and interest rates, as it lowers the loan-to-value ratio. This is offered by banks and traditional lenders.

CMHC-insured mortgages are a popular choice for investors financing multi-residential properties, offering lower down payment requirements. These mortgages can be as low as 15% for qualifying properties, significantly lower than conventional mortgages' 25%-35%. The Canada Mortgage and Housing Corporation (CMHC) insures the loan, reducing lender risk and allowing higher loan-to-value ratios and lower interest rates. However, additional fees may apply due to CMHC insurance.

Private mortgages are used by borrowers who don't meet strict requirements for conventional or CMHC-insured loans, typically requiring a down payment of 25%-35%. Private lenders are more flexible with terms and may work with individuals with unique financial circumstances or credit challenges. They offer the advantage of negotiating terms that suit specific needs, such as shorter terms or financing riskier properties.

Build a Business Plan

A comprehensive business plan showcases a borrowers' vision, experience, and strategy for managing and generating income from a property. It gives lenders confidence that the borrowers are prepared to succeed and handle the responsibility of the investment.

This plan should demonstrate the long-term goals and how the property fits into the overall business strategy. Lenders want to understand how the property will be used, whether for rental income, operational purposes, or future expansion. By articulating your vision, you show the lender that you have thought through how this purchase will contribute to your business's growth and stability.

Lenders prefer working with borrowers who have a track record of successfully managing similar properties. Your business plan should highlight your industry knowledge, management skills, and commitment to success. Outlining projected income and financial performance is essential, as lenders will scrutinize these numbers to ensure you meet your financial obligations.

It also shows preparedness and risk mitigation. It can include contingency plans for vacancy periods, unexpected maintenance costs, or fluctuations in rental income. When lenders see that you have a plan in place for various scenarios, it increases their confidence in your ability to manage the investment successfully.

A strong business plan adds credibility to your mortgage application, showing lenders that you have invested time and effort into planning the property's future and understand what's required to make the investment successful. A clear, well-researched, and realistic business plan can make your application stand out, especially if you're competing with other borrowers for the same property.

While navigating these steps, you may feel excitement and even apprehension. After all, a commercial mortgage is a major commitment. But with preparation and a strong understanding of what lenders seek, you can move forward with confidence.

The takeaway here? Preparation is everything. By laying the groundwork, selecting the right mortgage, and meeting the financial criteria, you’re setting up your business for greater stability and control.

Are you ready to start your journey? Wilson Mortgage is here to help! Serving Niagara and St. Catharines, we’re ready to guide you through every step of the process. Call us today at 1-800-969-0014 to get started!