The rate of interest that a borrower will need to pay their lender is known as their mortgage rate. Commercial mortgage rates are usually higher than the rates for residential properties.
Here, we will discuss some of the key differences between residential and commercial mortgage rates so you completely understand the difference between the two and can make educated decisions about which one is right for your needs.
What Are The Differences Between Residential and Commercial Mortgages?
Residential mortgages are usually intended for conventional homebuyers. For instance, many people will turn to a residential mortgage to buy their first home and start a family.
However, some small real estate investors who are looking to get their foot in the door, may also opt for a residential mortgage. Commercial mortgages are usually offered to large investment enterprises specializing in real estate purchases.
The mortgage rate for commercial mortgages tends to be higher than the rates offered to conventional homebuyers. However, the rates tend to be lower than traditional commercial loans.
As for the rate benchmark, the Bank of Canada (BOC) overnight rate is the norm with residential mortgages, whereas the BOC five-year bond will determine the commercial mortgage rate benchmark.
Moreover, the maximum loan to value (LTV) that can be approved for a residential mortgage is 95%, whereas the maximum LTV for a commercial mortgage sits at 85%.
It should also be noted that the maximum amortization for a residential mortgage is 25 years, while the maximum amortization for a commercial mortgage is 40 years.
Regarding the qualification criteria, both types will involve carefully assessing the borrower’s financials. However, one key difference is that the prospective lender will also consider the potential income generation of the commercial property when determining the commercial mortgage interest rate.
Residential vs Commercial Mortgage Rates
Commercial mortgage rates tend to be higher than residential mortgage rates. They also tend to have a shorter loan term. One of the reasons for this key difference is that commercial mortgages also have a secondary business market to consider.
Furthermore, getting a mortgage approved for a residential property tends to be a relatively easy process, with many homebuyers enjoying zero down payments if they have adequate credit.
The down payment amount is also usually negotiable with residential mortgages. If your loan-to-value (LTV) ratio exceeds 80%, the only requirement may be to pay a lender’s mortgage insurance amount.
Commercial mortgages carry more risk than residential mortgages. Ergo, the LTV ratio will need to be over 80% even to be considered in most cases. What’s more, the down payment minimum is usually 20% for a commercial mortgage.
However, if the business climate is potent, then some investors may be able to lower the down payment to roughly 10%.
How to Get the Best Mortgage Rates in Canada
You need to have a clear idea of how much you can realistically afford. The approval process will also be easier if you can find someone to co-sign, provided that they have good credit.
You should improve your credit score by paying off any outstanding debts and making timely payments on your credit cards and any other forms of debt you may have. Many professional mortgage brokers will be more than happy to help you explore your options and find the best mortgage rates available.
Their expertise and industry connections will allow them to canvas and identify different lending options that are best suited to your unique needs. They can find the right deals that cater to your present financial status and future aspirations. In addition, you should consider how long the loan term will be before you sign anything.
A shorter-term may mean you will have higher monthly payments. Still, it will also allow you to build equity faster, allowing you to access certain financing options that would otherwise be unavailable to you.
You will also own your property sooner, provided you can fulfill the obligations of your legally binding arrangement with your lender.
By accurately calculating the interest amount and by setting realistic financial goals, you should be able to get the best mortgage rates in Canada.
Taking the First Step
Interest rates for commercial mortgages tend to be higher, and their terms tend to be shorter. Some of the factors you need to consider before choosing the right mortgage type include the length of the period and whether you want an open or closed mortgage.
You also need to determine whether you want a variable or fixed-rate mortgage and the amortization period.
With a fixed-rate mortgage, the interest rate will remain stable throughout the mortgage term, whereas the rate may fluctuate when you take on a variable interest rate mortgage.
Sources:
The Difference Between Residential Loans And Commercial Loans | ALCC (alccommercial.com.au)
Commercial Mortgage Guide and Rates – 2022 | WOWA.ca
How to choose the right type of mortgage for you (canadalife.com)
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Thanks for sharing such a resourceful post. Yes, indeed, there is a difference in commercial and residential mortgage rates. Commercial mortgage rate is much higher than that of residential mortgage.