Commercial Mortgage Guide: Financing Commercial Property

Commercial mortgages differ significantly from residential mortgages. This guide covers the requirements, process, and strategies for financing commercial property in Canada.

Key Differences from Residential

• Larger down payment: 25-35%+ (vs 5-20%)
• Shorter amortization: 20-25 years (vs 25-30)
• Shorter term: 1-5 years (vs 5-10)
• Higher rates: 1-3% above residential
• DSCR requirement: Must demonstrate income coverage
• Property-focused: Income potential matters more than personal income

What Is DSCR?

DSCR measures the property's ability to cover mortgage payments from its income.

Formula

DSCR = Net Operating Income (NOI) / Annual Debt Service

Lender Requirements

• Minimum DSCR: 1.25 (most lenders)
• Preferred DSCR: 1.35-1.50

Example

NOI: $100,000/year
Annual mortgage payments: $72,000/year
DSCR: $100,000 / $72,000 = 1.39

Use our Commercial Mortgage Calculator to calculate DSCR.

Conventional Mortgage

• From banks and credit unions
• 25-35% down payment
• 1-5 year terms, 20-25 year amortization

CMHC-Insured Mortgage (Multi-Family)

• For apartment buildings (5+ units)
• Lower down payment (15-25%)
• Lower rates (insured)
• Longer amortization (up to 30 years)

Bridge Financing

• Short-term (6-24 months)
• For acquisitions, renovations, or repositioning
• Higher rates (8-15%)
• Interest-only payments

Construction Mortgage

• For building new commercial property
• Funds released in stages
• Interest-only during construction

Major Banks

• RBC, TD, Scotia, BMO, CIBC
• Most competitive rates
• Strictest qualification

Credit Unions

• More flexible than big banks
• Better for smaller or unique properties
• Local market knowledge

Mortgage Investment Corporations (MICs)

• Private mortgage pools
• Higher rates (8-12%)
• Shorter terms (6-24 months)

Private Lenders

• Individual or group investors
• Highest rates (10-15%+)
• Shortest terms
• Fastest approval

Step 1: Prepare Documentation

• Property financials: 2-3 years of income/expense
• Rent roll: Current leases and tenant info
• Personal financials: Net worth statement, tax returns
• Property appraisal: Ordered by lender
• Environmental assessment: Phase I (and II if needed)

Step 2: Submit Application

• Complete lender's application
• Provide all documentation
• Pay application fee ($500-$2,500)

Step 3: Lender Review

• Underwriter reviews application
• Orders appraisal and environmental assessment
• Evaluates DSCR and borrower strength
• 2-6 weeks for decision

Step 4: Conditional Approval

• Lender issues commitment letter
• Outlines terms and conditions
• Review with your lawyer

Property Factors

• Income stability: Lease terms and tenant quality
• DSCR: Must meet minimum (1.25+)
• Property condition: Physical inspection
• Location: Market strength and trends
• Zoning: Legal use compliance
• Environmental: No contamination issues

Borrower Factors

• Credit score: 680+ for most lenders
• Net worth: Must demonstrate financial strength
• Experience: Property management or commercial real estate
• Income: Personal and business income
• Liquidity: Cash reserves after purchase

Commercial mortgages require larger down payments, focus on property income (DSCR), and have shorter terms than residential. Prepare thorough documentation and work with a commercial mortgage broker. Use our Commercial Mortgage Calculator and other Calculators. The AI Advisor can answer commercial financing questions.

This guide is for educational purposes only.