Why are Commercial Mortgage Rates Higher Than Residential Mortgage Rates?
If you’ve been shopping for a loan on business property, you would have noticed that commercial mortgage rates in Ontario are typically higher than residential equivalents, even when comparing similar values. In most cases, the interest on a commercial mortgage can be between 0.25% and 0.75% more than what you would expect in the residential market.
There are reasons for this, and all of them are quite when you consider the risk that is involved in commercial lending. Before you settle on a loan package, lender, or broker, understand the factors that contribute to commercial mortgage rates in Ontario and how they could affect you.
Factors That Contribute to Higher Rates
Commercial mortgages are purchased by registered companies rather than individuals. The property can vary in purpose and zoning, ranging from a mixed-use property, right up to dedicated office spaces, storage facilities, and retail sites. Business structure and the type of property can make risk assessment complicated.
- Determining the creditworthiness of a company can be difficult because they often don’t have as long of a credit history as private individuals.
- New businesses usually have fewer assets than those that have been long established. This introduces risk to the lender.
- Some commercial mortgages are taken out on properties that will be used as a primary source of income. Apartment buildings or multi-tenant commercial buildings are examples of this.
- Limited liability companies are inherently risky for lenders. If a business fails, foreclosure is the only viable way for a lender to recoup their investment.
Taking all of this into consideration, it’s easy to see why lenders attach higher rates. Of course, rates aren’t static. There are ways that you can improve the rate offered.
How to Get Better Commercial Mortgage Rates in Ontario
If you operate a business under a partnership, apply for a mortgage through the partner who has the best credit score. Include all relevant information in an application. Insurance, proof of income, past financials, proof of credit rating, and proof of the total value of the business can all help.
The proposed location of the business can affect commercial mortgage rates in Ontario. Lenders always consider foreclosure as a potential outcome. A mortgage taken on a property in a rural area is inherently risky. Choosing a site within an urbanized area will give the lender more confidence that they can foreclose and sell if the mortgagee has defaulted.
The type of loan can also impact commercial mortgage rates in Ontario. A fixed-rate loan will usually offer the best rate, although you will lose the potential of a lower rate in the future. A variable rate loan could allow you to take advantage of a better interest rate environment later. There’s no way to accurately predict the market so your choice of fixed or variable will come down to how adaptable you are to changing conditions.
Most importantly, you should avoid shopping for a commercial mortgage directly through lenders. The process is time-consuming and you will miss out on the best offers on the market.
A commercial mortgage broker can work with you to understand your needs. They have access to numerous lenders in Ontario and will shop for the best rates and terms. A broker can also provide general advice surrounding the application process, making things simple and stress-free.
Yes, commercial rates are higher than in the residential market, but with the assistance of a broker, you can find the best deal that suits the nature of your business.
To book an appointment to discuss your needs and learn more about how Mortgage Capital Investment can help you, call 416-877-7438 or