Finding the perfect space for your business requires a keen sense of location. Where your business is located could easily make or break its name in the market, which is why prime real estate such as storefronts along busy streets or large expanses of land quickly skyrocket in value. For budding entrepreneurs, this can mean entering the race to finding the best terms for a commercial mortgage.
The goal is to maintain low and steady interest rates on your commercial mortgage. This way, your business maintains a healthy cash flow. Find out how you can do that here:
How to Lower Commercial Mortgage Interest Rates: Finding the Best Financing Option
Commercial mortgage terms are contingent on the financing options that you select. Putting down a strategic amount of capital towards acquiring or leasing a commercial property will reduce the number of mortgage payments you will have to make, as well as the interest you are charged.
But how do you know which option is best for you? Here’s a quick guide to the most common options you can choose from and what each means for the financial health of your business:
Loan-to-value Ratio
In the simplest terms, taking out a commercial mortgage can be very similar to a personal loan for a specific purpose. Chances are, you have some portion of the amount necessary and are looking to augment these funds to pay towards a purchase, service or investment. For commercial transactions, lenders generally offer to finance anywhere between 75% to 100% of the value of the property you are looking to acquire. The investment that a particular lender is willing to make depends on the condition of the property and resale value as these parameters indicate an increase in the value of the asset over time, and therefore, profitability.
On the flip side, commercial mortgages that do not finance 100% of the property value require business owners to put up the rest of the cost of acquiring or leasing the property. While this could mean less cash flow to cover immediate expenses or present growth ventures, a lower loan-to-value ratio could lead to lower interest rates and lesser mortgage payments overall in the long run. This also presents an opportunity for increased cash flow as fewer capital expenditures going back to mortgage payments would need to be made.
Propensity for Risk
One of the key factors that determine interest rates of commercial mortgages is your propensity for risk as the borrower. Lenders will want to look at your credit rating and serviceability to ensure that your business venture will provide significant returns that will allow you to make mortgage repayments.
In addition to your financial history, lenders will also want to evaluate your business venture for risk. Factors such as current position in the market, assets, potential for growth and profit are examined to determine if providing your business with a commercial mortgage would benefit both you and the lender. To guarantee approval and maintain favourable interest rates, it’s important to ensure that your business is in good financial health, demonstrating that expected cash flows can support mortgage repayments.
Fixed or Variable Rates
Commercial mortgage rates are either fixed or variable—selecting the best option for your business boils down to the conditions that determine its financial health.
As the term suggests, fixed rates man that the interest rate remains uniform for a certain period until it reverts to a variable rate or is renegotiated. This means that you could be paying the same amount of interest anywhere between two years to the entirety of the amortization period. While a fixed rate protects your business from surges in the market value of the property, this could also mean paying the same interest rates even when the market swings in your favour.
On the other hand, variable rates are determined by banks across Canada, and lenders will then base the interest rate of your mortgage off these figures while taking into account individual merits. Variable interest rates come at a much higher risk, depending on when your commercial mortgage takes into effect with respect to market fluctuations.
Get the Best Commercial Mortgage Interest Rates in Canada
Compared to residential mortgages, interest rates for commercial ones are understandably higher due to the sheer amount of investment that the lender has to make in order to support a budding business venture. The challenge is to recoup these capital expenses by exceeding profit margins.
With constant fluctuations in the market, making enough bank for mortgage repayments and keeping your business afloat in the current economy are more challenging tasks than they sound. On the upside, professional mortgage brokers and trusted lenders make it their mission to help business owners like yourself. At their expert direction, navigating various financing options to iron out the best mortgage terms for the growth of business ventures can be reasonably risk-free.
For more information about commercial mortgages and getting the best rates in Canada, call 1-888-495-4825, or contact us here.
