Commercial Mortgage

A commercial mortgage is financing secured against property used primarily to generate income or run a business, rather than as an owner's principal residence. In Canada that covers office buildings, retail and strip plazas, industrial and warehouse space, multi-family residential buildings of five units or more, mixed-use buildings, hospitality, self-storage, and raw land held for development.

The key difference from a residential mortgage is what the lender underwrites. A residential lender underwrites you — your income, your credit, your debt ratios. A commercial lender underwrites the property first: what it earns, how reliably it earns it, and whether that income comfortably covers the loan payments. Your own financial strength matters, but it is the second question, not the first.

Three numbers drive almost every commercial approval in Canada.

Net Operating Income (NOI) — annual rental revenue less vacancy allowance and all operating expenses (property taxes, insurance, utilities, management, repairs, reserves). Mortgage payments are not an operating expense; NOI is calculated before financing.

Debt Service Coverage Ratio (DSCR) — NOI divided by annual mortgage payments. Most conventional Canadian commercial lenders want 1.20x to 1.30x, meaning the property must earn 20–30% more than the mortgage costs. CMHC-insured multi-family can go as low as 1.10x. A property that only breaks even at 1.00x will not be financed conventionally.

Loan-to-Value (LTV) — the loan divided by the appraised value. Typical conventional maximums are 75% on multi-family, 65–75% on industrial and retail, 65% on office, and 50–65% on special-purpose or hospitality property. Land is lower again, often 50% or less.

The binding constraint is whichever produces the smaller loan. On a low-cap-rate property in Vancouver or Toronto, DSCR usually caps the loan well before LTV does — which is why a strong-looking building in an expensive market often supports less debt than owners expect.

A 12-unit apartment building in Kelowna is listed at $3,200,000.

At a 5.75% commercial rate on a 25-year amortization, each $1,000,000 borrowed costs roughly $75,000 per year in payments. To hit a 1.25x DSCR the property can support annual payments of $164,160 ÷ 1.25 = $131,328 — about $1,750,000 of debt.

That is 55% LTV, well under the 75% the lender would otherwise allow. In this case DSCR is the binding constraint, so the buyer needs roughly $1,450,000 down plus closing costs, not the 25% they may have budgeted. Running the numbers before writing an offer is the single most valuable thing a commercial buyer can do.

Commercial rates are quoted as a spread over the Government of Canada bond of matching term, so they move with bond yields rather than with the Bank of Canada overnight rate. Expect commercial pricing to sit meaningfully above residential pricing on the same day — the gap reflects the property risk, not your credit.

Terms are typically 1 to 10 years, with 5 years the most common. Amortizations run 15 to 25 years on most asset classes, and up to 30–40 years on CMHC-insured multi-family. Many commercial loans are written with a balloon: the balance comes due at the end of the term and must be repaid or refinanced, so the exit plan matters as much as the entry.

For residential rental buildings of five units or more, CMHC mortgage loan insurance is often the single best-value option in Canada. It allows higher leverage (up to 85% LTV on standard rental, higher on affordable and MLI Select projects), amortizations up to 40 years, and interest rates materially below conventional commercial pricing because the lender's risk is insured.

The trade-offs are a CMHC premium added to the loan, an application fee per unit, and a longer approval timeline — commonly 60 to 120 days. On a building you intend to hold, the rate saving over a five-year term usually exceeds the premium several times over. On a short-hold or value-add play, the timeline and prepayment restrictions may not suit.

A complete commercial package moves far faster than a partial one. Expect to provide:

Environmental and building condition reports are the most common source of delay. On any industrial, automotive, dry-cleaning, or gas-station-adjacent site, order the Phase I early.

Commercial transactions carry costs that residential buyers rarely see:

Budget 2% to 4% of the purchase price for closing costs on a typical commercial deal, over and above the down payment.

Not every good deal fits a bank. Chartered banks and credit unions offer the best pricing on stabilized, well-tenanted property with strong sponsors. Alternative and B lenders take on properties with vacancy, short lease terms, transitional cash flow, or borrowers whose tax-optimized statements understate real income. Private lenders fund on speed and story — bridge financing, land, construction takeout, and repositioning plays — at higher rates and shorter terms, with a defined exit.

Working through a network of lenders means the file goes first to the lender whose policies already fit the property, rather than being shopped bank by bank after a decline.