What are Commercial Mortgage Rates?
Understanding the Lending Market
Throughout Canada, you will find large banks, credit unions, and independent lenders offering commercial mortgages. You can also buy mortgages through a broker, giving you access to the most competitive terms and rates.
There are two types of rate structures for mortgages offered by lenders. Understanding what are commercial mortgage rates will help you to make the right decision on your next investment.
What are Commercial Mortgage Rates and How Do They Fit into Unique Mortgage Products?
Interest rates have a significant impact on the cost of any mortgage. You need to consider the structure of how rates are set throughout a mortgage. For example, rates can be variable, relying on changes in Bank of Canada rates and market conditions. Rates may also be fixed, allowing you to take long-term advantage of the low-interest-rate environment today.
Mortgage lenders set their rates based on a few different factors. One of the most important is the prime lending rate, also referred to as the variable rate.
This is a rate set by Canada’s largest banks to set their interest structures. Essentially, the prime rate is the best-case scenario for a borrower with perfect credit and the highest possible measure of creditworthiness. In practice, borrowers won’t be offered the prime rate, but it can give an indicator of the current state of the market.
The current prime rate is set at 3.9%. Borrowers can expect loans to be offered with a rate exceeding this figure, but rarely below it.
Commercial Mortgages with Variable Rates
Some first-time commercial mortgage borrowers may be confused by how banks use the terms prime rate and variable rate interchangeably. This is because the variable rate can also refer to a type of mortgage product.
To keep it simple and in perspective, think of variable rate commercial mortgages as products where the interest rate can change, depending on the movement of the prime rate and other factors. For example, if you were to borrow today at a rate of 8% on a variable rate mortgage, you could find that the rate decreases along with the prime rate. Alternatively, if the economy goes in the other direction, you could end up paying a higher interest rate as the prime rate increases.
This adds risk to a variable rate mortgage.
- The rate on your loan will fluctuate. You will constantly ask the question: what are commercial mortgage rates today? This can make financial planning difficult.
- If the rate increases, your static monthly payment will contribute less to the principal amount on your loan. This would increase the amortization period and leave you in debt for longer.
Of course, there’s a flip side to this. A variable-rate also offers benefits.
- If the interest rate decreases, more of your fixed monthly payment will go to the principal amount. You could potentially pay off your mortgage faster than expected.
- You won’t have to refinance if interest rates decrease. You will be able to take advantage of the lower rate without having to pay new closing costs.
Commercial Mortgages with Fixed Rates
Alternatively, you could seek a fixed-rate mortgage where the amortization will remain constant throughout the term. With interest rates being relatively low today, the fixed rate is compelling.
As you learn what are commercial mortgage rates, it’s important to understand that fixed terms structure interest in a way that is weighted towards the beginning of the term.
If you closed a fixed rate commercial mortgage today, your initial amortization would go mostly towards the interest. In some cases, your early payments could be up to 95% interest, with the remainder going to the principal. This means that you won’t start building a significant amount of equity until the later stage of the amortization period. Lenders structure their loans differently, so this is something that you need to check carefully when comparing offers.
If you want to get the best rate with the most favourable interest structure, an Ontario mortgage broker will be essential.
How does Canada Mortgage Bonds Affect Fixed-Rate Mortgages?
If you purchase a fixed-rate mortgage, the current prime rate is not the baseline. Instead, lenders base their rates on current Canada Mortgage Bond yields.
Bonds are a type of debt with a promise to repay. The Canada Mortgage and Housing Corporation (CMHC) manages these bonds to ensure stability in the mortgage market.
CMHC sells bonds to investors.
It then uses the money generated to purchase mortgages from lenders.
Lenders use the proceeds to offer mortgages. They add a markup over the bond rate, which becomes your mortgage interest rate.
The bonds are guaranteed, which keeps the market stable.
In the simplest terms; a lender is able to offer you finance by selling their mortgages to the Canadian government, which then sells bonds to investors.
This is why you will see changes in fixed interest rates when the bond market fluctuates. Of course, your original interest rate will be locked in for the full term of your loan. This can create security and stability.
The Best Option for Your Commercial Mortgage
You’ve asked the question: what are commercial mortgage rates? You now understand how fixed and variable rates are set.
Variable rates are volatile, but this could be beneficial if rates trend downwards. Fixed rates are stable, but you could potentially lose our if interest rates decline during the term of your loan.
Knowing the best option requires an assessment of your finances and goals. Professional advice is the best way to determine which type of loan is right for you.
If you are considering investing in a commercial property, our brokerage service can help you to find the most competitive loan, whether you are looking for a fixed or variable rate. With extensive experience in the industry and a large network of lenders, we can find the best rates that aren’t usually offered on the public market.
Consultation today will help you to find the perfect solution for your next purchase. Finding a commercial mortgage is one of the most important financial decisions you will ever make. We will ensure that your decision is fully informed, with the very best mortgages made available.
To book an appointment to discuss your needs and learn more about how Mortgage Capital Investment can help you, call 416-877-7438 today, or contact us.