If you’ve never had a commercial loan before and are considering purchasing a commercial property to run a business or for an investment property, you need to know the differences between a commercial mortgage and a residential mortgage. By talking to mortgage broker Oakville buyers can learn how to get a commercial loan, but they should first familiarize themselves with the following differences.
Interest Rates Are Higher
In general, you will find that commercial mortgages have higher interest rates than residential mortgages. One of the main reasons for this is that the risk to the lender is higher on commercial properties than on residential properties. People tend to be more willing to default on commercial loans than on the one that’s keeping a roof over their head and their family’s head. Additionally, commercial lenders look at the property’s risk more carefully than residential lenders because location and use can be major risk factors that lenders may not want to take.
Not All Financial Entities Offer Commercial Loans
Nearly every national and local bank or credit union offers residential home loans, but typically only local banks offer commercial loans. This is because they are tied to the community and are more willing to invest in the businesses in the community. National banks usually won’t provide commercial loans because their risk of default is too high. Therefore, if you’re looking to open a business in a state other than the one you’re in, you’ll likely need to go through a bank in that state to get a loan.
Terms Are Usually Shorter
In another effort to lessen their risk, commercial mortgage lenders often require the loans to be paid off in a shorter amount of time. Most residential mortgages have a 30-year term, at least at first, but commercial loans are usually half that or less. This means your payments will be higher than they would be if you had a 30-year term, but you’ll own the building a lot faster as well. While you may be able to find a commercial loan with a 20-year term, that’s an outlier, as most loans will be for 10 or 15 years.
Rates Are Usually Variable
Residential loans typically have a fixed rate for the term of the loan, which means your payments won’t vary much, except when your taxes change. However, commercial loans usually have variable rates, which means your payment can go up or down each year depending on what the interest rates are. A variable rate also protects the lender a little more because if rates skyrocket, they are able to increase your payment to compensate. The good thing is that when rates go down, your payment will also go down. Just don’t expect that to happen every year.
A Higher Down Payment May Be Required
The typical down payment for a residential property is 20%, although homebuyers can usually get a loan with a lower down payment if they get an FHA loan or a conventional loan with mortgage insurance. Commercial loans, on the other hand, typically require a higher down payment to mitigate the lender’s risk. The amount of down payment can be anywhere from 25% to 50%, so be sure to shop around with your local banks for the best deal.
Investing in property for your business or as a landlord can be a great way to boost your profits, but you need to understand how commercial loans differ from residential loans so that you know what to expect when applying for one. Additionally, you’ll be able to get your financial affairs in order before you apply to increase your odds of approval.