Partners & Lenders
Mortgage Capital Investment (MCI) offers you one of the simplest and quickest ways to get approved for a commercial mortgage. As licensed and experienced mortgage brokers in Ontario, we work with the best commercial lenders to ensure that you have options whether you are borrowing for the first time, refinancing, or even funding construction of a new project.
The mortgage market can be complicated, which is why it’s essential to have a professional working towards your interests.
Bank, Private Lender, or Mortgage Broker – Which Should I use?
One of the most important decisions you will make is choosing whether to apply for a mortgage with a large bank or use a mortgage broker to access a private lender network.
We work with both banks and private lending institutions and believe it’s important to cover each option. In the following sections, you’ll learn the pros and cons of banks and private lending, helping you to make a choice that suits your unique needs.
Your Options When Borrowing Money for a Commercial Investment
As with any major financial decision, there are pros and cons to the different options that are available to you. Large banks come with a sense of security and an impression that it’s easy to do business. Unfortunately, the actual experience can differ significantly from that perception.
There’s an element of risk in every commercial mortgage. Beyond your creditworthiness and the projected income of the property you want to buy, lenders need to look at other factors to determine the best terms and interest rates.
The Pros and Cons of Finding a Mortgage with a Large Bank
Commercial property investors usually approach banks first, and there are benefits and downsides to doing this.
- Banks often have the lowest advertised mortgage rates.
- They use standard qualification criteria that most borrowers are familiar with.
- Strict criteria reduce the risk of mortgage defaults.
- Loan terms and amortization periods are usually long-term.
- Because lending criteria are strict, there’s little flexibility.
- Criteria may not look beyond standard creditworthiness and income tests.
- Approval processes are lengthy.
- Limited support for unconventional loans.
- Pre-payment penalties can be high.
Many of the big banks are considered the best commercial lenders. However, you do have other options.
The Pros and Cons of Finding a Mortgage with Private Financing
Mortgage brokers work with banks as well as large networks of smaller institutions and private lenders. This can extend your borrowing potential in many cases. Like banks, private lenders have pros and cons to consider.
- Lending requirements are more flexible. Brokers will negotiate on your behalf.
- The funding process can be speedy, reducing the time and stress involved.
- Fees and closing costs may be lower than banks.
- Interest rates may be higher, as private lenders expect a higher return on investment.
- In addition to property income assessment, private financiers will look for a business exit strategy, and cross-collateral in some cases.
Loans may only be short or mid-term.
A private financier may offer a lifeline to your business in cases where a bank loan is unrealistic.
Mortgage brokers can help you to make the right decision based on all the available offers and your current financial situation.
Choosing the Best Commercial Lenders – Important Points to Consider
Most business owners gravitate towards a traditional bank loan. Some even consider this the only legitimate way to get funding for a commercial real estate purchase. As experienced mortgage brokers, we can tell you that this is not the case.
Banks offer better interest rates, and most borrowers find this hard to ignore. However, when you look at why they have lower rates, the situation starts to look a little different.
Banks generate a significant amount of profit from lending money. They take money from their depositors with the promise of keeping it secure or returning interest payments throughout the year. They then use that money to lend to borrowers. The interest that banks pay to depositors is extremely low. Some savings interest rates are less than half a percentage point.
In addition to being able to lend money generated from depositors, banks also have access to government funds. The government funds rate is extremely low, so, again, banks are at a significant advantage.
Compare this to a private lender that doesn’t have access to depositors or government funds. Any money used for lending comes from loans or private investors. This places even the best commercial lenders at a significant disadvantage when compared to banks.
At this point, it should be clear why interest rates are higher in the private lending market.
How the Spread Factors into a Bank’s Interest Rate
In your research to find the best commercial lenders, you’ve probably seen the ‘spread’ mentioned more than once. This is an industry term that refers to the difference in the interest rate that a bank charges a borrower and pays to a depositor (or a lender like the government).
Let’s look at an example to put it in perspective…
If a bank borrows funds at 2.5% and lends funds at 8.5%, they will have a 6% spread in the middle. This represents the money that covers their expenses and all overhead costs. It also generates some profit.
Now, compare this to a private lender. An independent financial institution doesn’t have access to government funds or depositors. It likely borrows money from a bank. It may borrow money at a rate of 7%. It then needs a spread of around 4% to cover expenses and operating costs. The private lender is leaner than a bank, so the spread is smaller. But, and here’s the most important part, the higher cost of borrowing means it will need to lend money at a rate of 11%. This is significantly higher than the bank’s 8.5% in the previous example.
Even if the private lender cuts into their spread, they still wouldn’t be able to compete with the bank.
Why Don’t Banks Discount Their Rates?
Banks know that private lenders are their competition. They also know that the lenders can’t possibly compete on rates.
If private lenders are averaging rates close to 11%, then banks can go right up to 10.5% without even hurting their business. They will still have the best rates, and they will make a tidy profit on top.
Beyond this, banks don’t rely solely on commercial mortgages to generate income. They make money from account fees, interest, and their own investments in other businesses, stocks, bonds, and foreign currency.
To put it bluntly, banks don’t technically need your business, and therefore they take less risk by implementing stricter lending conditions.
Are the Best Commercial Lenders Banks or Private Lenders?
Any experienced mortgage broker will tell you that the best lender is the one that suits your needs, and that approves your application.
On one end of the spectrum, you have lower interest rates but strict lending criteria. On the other, you have relaxed criteria but higher interest rates. Most businesses that can get bank approval will go with a bank. The unfortunate reality is that bank approval is difficult in the commercial mortgage market.
While there’s no way to categorically say that one option is better than the other, there are some things to keep in mind as you explore your options:
You should aim to get your business into a position where it would qualify for a bank loan. Strategies include reducing debt, increasing your revenue, and building up your assets.
A short-term mortgage or business loan from a private lender can be an effective financial lifeline or stopgap. Consider that costs on a two or three-year loan, even with a high interest rate, will not turn out to be excessive over the term and amortization period.
A private loan or mortgage is a better alternative to letting your business stagnate. If you can’t get a bank loan today, but you do get approved by a private lender, then it would make sense to take the opportunity.
Regardless of which direction you go, you can ensure that you get the best terms and the lowest possible rate by working with Mortgage Capital Investment (MCI), a leading Ontario mortgage broker.
Even with the information covered above, you may still have questions relating to applying for financing, increasing your chances of approval, and finding the best package that suits your business needs. Mortgage Capital Investment (MCI) can help. Our brokerage service will act on your behalf to ensure that you get a mortgage offer that meets your needs and is within your means.
Contact us today if you want to connect with the best commercial lenders in Ontario.