When it comes to financing commercial properties or growing existing businesses, many entrepreneurs turn to commercial mortgages to realize their dreams. But how does a commercial mortgage work? Let us demystify the process and empower you to make informed decisions for your business.
What Is a Commercial Mortgage?
A commercial mortgage is a loan taken out by businesses or investors to purchase or expand commercial properties such as office buildings, retail spaces, or warehouses. Unlike residential mortgages, which are used to finance personal homes, commercial mortgages cater specifically to the unique needs of business ventures.
How It Works
Eligibility and Assets
When you apply for funding, lenders typically assess your creditworthiness and the value of the property. Although each lender may have specific eligibility criteria, factors such as financial history, business plan, and collateral strength determine the overall process.
Loan Terms and Interest Rates
Commercial mortgages come with various loan terms and interest rates. These loans are typically long-term, often ranging from 5 to 25 years. The interest rates can either be fixed or variable, depending on the lender and market conditions. As a borrower, it's crucial to consider your financial goals and risk appetite to choose the most suitable option.
Loan-to-Value Ratio and Down Payment
Lenders determine the loan amount by evaluating the property's value using a loan-to-value (LTV) ratio. This ratio represents the percentage of the property's appraised value that lenders are willing to finance.
Lenders usually finance up to 70% of the property's value. Borrowers are expected to provide a down payment for the remaining balance.
Commercial mortgages generally follow an amortization schedule that consists of both principal and interest payments. The most common repayment structures are fixed-rate and adjustable-rate mortgage (ARM).