By : Radu Arvatescu
If you’re looking to purchase commercial real estate or refinance one of your current investments, a commercial mortgage calculator will be one of the first things you look at.
Mortgage calculators can give you a baseline understanding of the cost of a mortgage. A basic calculator will look at the principal amount, interest, and repayments.
However, if you’ve ever purchased a mortgage before, you will know that calculators aren’t completely accurate. Basing your decision on a calculator alone is not the best way to go forward with an agreement or particular lender.
Before you make a major financial decision based around a simple calculation, consider all of the hidden costs that might be missing.
The Flaws in a Basic Commercial Mortgage Calculator
Perform a quick search for mortgage calculators and you’ll find that most have just four basic fields:
- Price of the commercial property.
- Down payment (or equity for refinancing).
- Interest rate.
- Amortization period.
Filling out these fields will give you only a basic understanding of the real repayments that you would make on a mortgage, and there are variables that you won’t know without first talking to a lender or mortgage broker.
Let’s talk about the interest rate first…
In Canada and every other developed market, mortgage interest rates are based on a prime rate. The lender then adds a markup as well as an adjustment based on your creditworthiness and financial history. The lender may also consider the viability of your business when determining an interest rate.
For example, if you are borrowing a commercial mortgage for the first time and have a limited credit history, the lender could see a higher level of risk, which would put your interest rate above the average. This means that even when you look at an average rate of around 5%, the actual cost of your mortgage could be quite different. There’s also the question of whether you would borrow with a floating rate or fixed-rate mortgage. This could significantly alter the cost of borrowing over the amortization period.
Other factors that are missing include property taxes and insurance on the mortgage. If you don’t have a sizeable asset to use as security (or if you would prefer not to), then you could have significant insurance payments on top of the principal amount.
These factors combine to make every commercial mortgage calculator a kind of “best-case scenario”. In most cases, your mortgage will be more expensive than what a calculator tells you.
How a Broker Can Give You a Better Understanding of Commercial Mortgages
While it’s not recommended to base your entire decision off a calculator, you can use one as a tool to give you a rough figure of what your repayments might look like. However, if you want the most accurate breakdown of the true cost of a mortgage, it makes more sense to work with a broker.
A mortgage broker in Ontario will use their own detailed commercial mortgage calculator to give you accurate figures. You can compare options from different lenders without having to go to each one individually. A broker will work on your behalf to find the best interest rates and terms that suit your needs and financial situation.
There’s nothing wrong with using a commercial mortgage calculator at the start of the exploration process. However, when you really want to get down to details, while getting the broadest range of options on the lending market, talking directly to a broker will always be the best option.
To book an appointment to discuss your needs and learn more about how Mortgage Capital Investment can help you, call 416-877-7438 .