3 Things To Know About Commercial Mortgage

Most businesses, particularly retail stores, will need a commercial property as their base of operations. Even if you mainly provide services and products online, you’ll still need a commercial property to accommodate your staff or house your products. 

If you’re considering buying or renovating your existing commercial real estate, you’ll need a commercial mortgage to pay for the purchase or necessary expenses. Here’s a closer look at the basic things you need to know about commercial mortgages. 

What Are Commercial Mortgages?

Also known as commercial real estate loans, commercial mortgages exist to finance properties used for business-related purposes, such as office buildings, warehouses, shopping or retail centers, industrial facilities, restaurants, hotels, apartment complexes, and rental properties, among others.  

Generally, a commercial real estate loan can be used to buy a new commercial property, refinance debt on a commercial property you own, or renovate existing income-generating properties such as apartments. 

Often, a mortgage loan is offered to a business entity such as a developer, corporation, or trust, although an individual business owner can also borrow one. Most commercial mortgages require the commercial property to be owner-occupied, meaning that that business should reside in at least 51% of the building. 

Commercial mortgage interest rates are up to 1% higher than residential mortgages. Interest rates can range from 3% to 20%, depending on the type of commercial property, loan, and financial profile of your business. Commercial real estate loans also have shorter repayment terms, which can increase monthly payments. 

Most business owners use an online mortgage repayment calculator to help them figure out how much commercial mortgage they can afford and evaluate various situations. 

Where Can You Get Commercial Mortgages?

When considering commercial mortgages, you have several options to get them from. These include:

  • Banks

Banks are the traditional providers of commercial real estate loans. 

  • Mortgage Brokers

A mortgage broker doesn’t provide commercial real estate loans, but they do help connect a business owner and a lender. Companies like Mel Finance, a reputable mortgage broker Melbourne has to offer, are often hired to obtain quotes from various lenders and help manage the process.  

  • Government Agencies

Government-backed companies and large government corporations are also active lenders for multi-family commercial mortgages.  

  • Peer-to-peer Marketplaces

You can use crowdlending platforms to match borrowers to lenders. Multiple online marketplaces are focused on commercial lending, providing various options from short-term bridge loans to long-term financing. 

What Are The Types Of Commercial Mortgages?

Depending on your needs, you have various options for commercial mortgages. Here are the standard options:

1. Traditional Commercial Mortgages

Similar to residential mortgages, traditional commercial mortgages often carry lower interest rates than other commercial real estate loans, making them appealing for startups and small business owners.

Terms can vary by lender. Banks often provide fully amortized loans of up to 10 years of repayment and at least a 65% loan-to-value ratio. That said, qualifying for this type of commercial mortgage is more complicated than others. Most lenders, particularly banks, look for good credit scores and a high debt service coverage ratio, which measures your business’s ability to repay a loan. 

2. Conduit Loans

A conduit loan refers to commercial mortgages pooled together with other business loans sold to investors on a secondary market. 

Conduit loans feature flexible requirements to help business owners that won’t qualify for traditional real estate loans. However, they have different features than conventional mortgages, such as a prepayment penalty fee when paying off your loan early. 

3. Commercial Bridge Loans

A commercial bridge loan offers quick financing and helps ‘bridge’ the gap until business owners can secure long-term funding for commercial real estate. 

Down payments can range from 10% to 20% with terms of up to three years only. As with any short-term loans, commercial bridge loans have higher interest rates than the current market rate. In addition, since there’s an increased risk for lenders, qualifying for a commercial bridge loan can be difficult. Lenders often look for a low debt-to-income ratio and a strong credit history.

4. Hard Money Loans

Like a bridge loan, hard money loans are short-term mortgages with higher interest rates. They also have higher down payment requirements and are offered by private lenders or investors. Hard money loans are easier to qualify for than bridge loans.