A commercial mortgage is a loan secured against commercial real estate, such as an office, warehouse, retail, or industrial property, used to finance the purchase or refinancing of that property.
Commercial mortgages are structured very differently from residential ones. Amortization periods are typically shorter, usually 20 to 25 years, and terms are commonly set for 5 to 10 years, after which the loan must be renewed at whatever rates are in the market at that time.
What lenders are really assessing is two things at once: the property’s ability to generate income and your ability to support the debt. They apply loan-to-value limits against the property and debt service coverage tests against the cash flow, and both need to work for the deal to be approved.
For business owners who own their operating premises, this is often the largest single debt on the balance sheet. The renewal is where the risk sits. A mortgage that was affordable when rates were low can become significantly more expensive at renewal, regardless of the original terms.
From a planning perspective, this is not something to think about at renewal. It needs to be modelled in advance. Understanding how rate changes affect your payments, and how that flows through your cash position, is part of managing the business, not just the property.
See also: Loan-to-Value (LTV) · Debt Service Coverage Ratio (DSCR) · RefinancingCommercial real estate financing decisions sit at the intersection of business cash flow and your overall balance sheet. See how Wefinx approaches Virtual CFO services.