Definition
A commercial mortgage is a loan secured by commercial property like office buildings, retail spaces, warehouses, and apartment complexes. It is typically taken out by businesses instead of individuals. This financial instrument is designed to finance the purchase, construction, or improvement of these properties.
Key Takeaways
- A Commercial Mortgage is a loan secured by a commercial property, not a residential property, such as shops, office buildings, apartment complexes, etc. The property may be owned by a business entity or an individual.
- These types of mortgages are typically used for business purposes such as purchasing a commercial property, refinancing a current mortgage, or for injecting funds into a business. Terms and interest rates often differ significantly from residential mortgages and depend on the lender’s assessment of the risk involved.
- Repayment of a Commercial Mortgage can be structured in different ways, with the most common being the amortization over a period of 15 to 20 years. However, many commercial mortgages have shorter-term lengths (around 5 to 10 years) with a balloon payment at the end. The credit history, financial health of the business and the value of the property significantly influence these terms.
Importance
Commercial Mortgage is a significant finance term as it pertains to a loan secured by commercial property such as an office building, shopping center, industrial warehouse, or apartment complex.
Essentially, the proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property.
Its importance lies in its ability to help businesses secure necessary financing without having to put up their assets or capital.
Instead, the property serves as a security to the lender, who can seize and sell it in event of a loan default.
Commercial mortgages are key to facilitating property ownership and real estate development in the commercial sector, which can boost economic growth, job creation, and business expansion.
Explanation
A Commercial Mortgage is a loan that is secured by a piece of commercial property, typically used in purchasing or refinancing commercial real estate. Businesses or investors often use this financial tool for the purpose of expanding their operations or for investment purposes.
This property can be an office building, a shopping center, a multi-family housing unit, a hotel, or any other income-generating property. The main reason businesses resort to commercial mortgages is to retain capital since outright purchases can be financially draining.
Moreover, using a commercial mortgage can provide a source of passive income if the property is rented out or leased. As well as, it allows for the potential appreciation of the property over time, adding to the asset base of the company.
This type of financing can be more complex than residential mortgages because the lender will closely evaluate both the property’s performance and the business owner’s creditworthiness. Overall, commercial mortgages serve a significant purpose for businesses, investors and developers looking to finance new acquisitions, developments, or simply to refinance existing property loans.
Examples of Commercial Mortgage
Shopping Malls and Retail Centers: A real estate developer may secure a commercial mortgage to finance the construction of a new shopping mall. Similarly, an investor may use a commercial mortgage to purchase an existing retail center. The loan is typically secured by the property itself, and the rental income generated from the stores would likely be used to help repay the mortgage.
Office Buildings: A corporation might take out a commercial mortgage to purchase or construct an office building. After the property is purchased or developed, the company could then lease out office space to other businesses, using the rent collected to make loan payments.
Hotels and Resorts: Owners and operators in the hospitality industry often use commercial mortgages to finance their properties. For example, a hotel chain may use a commercial mortgage to finance the construction of a new hotel, or an established hotel may use one to renovate and upgrade its facilities. The revenue from hotel guests typically aids in repaying the loan.
Commercial Mortgage FAQ
What Is a Commercial Mortgage?
A commercial mortgage is a loan secured by commercial property, such as an office building, shopping center, industrialfacilities, or an apartment complex. The proceeds from a commercial mortgage are typically used to purchase, refinance, or redevelop commercial property.
How Does a Commercial Mortgage Work?
Commercial mortgages work similar to residential mortgages. The borrower makes a down payment on the property and the rest of the purchasing price is covered by the loan. The property itself acts as collateral for the loan. If the borrower defaults on the loan, the lender can seize the property.
What are the Interest Rates for Commercial Mortgages?
Interest rates for commercial mortgages vary greatly depending on the lender, the creditworthiness of the borrower, the type and location of the property and the length of the loan term. As of today, they generally range from 3% to 12%.
What is the Term Length of a Commercial Mortgage?
Commercial mortgages typically have a term of 10 to 20 years, though this can vary depending on the specifics of the mortgage. Some commercial mortgages have shorter terms, with the full amount of the loan due at the end of the term, and others may be structured as installment loans where the property owner pays a part of the principal with each payment.
Who is Eligible for a Commercial Mortgage?
Eligibility for a commercial mortgage varies by lender, but in general, the borrower should have a minimum credit score of 680, and the business should have been operational for at least 3 years. In addition, the proposed monthly payments on the loan should not exceed the borrower’s net income.
Related Entrepreneurship Terms
- Loan-to-Value Ratio (LTV)
- Amortization
- Commercial Property
- Debt Service Coverage Ratio (DSCR)
- Underwriting
Sources for More Information
- Investopedia: An excellent and comprehensive source for understanding the term ‘Commercial Mortgage’ with related finance terms and examples.
- Bankrate: Provides up-to-date information about mortgage rates, including commercial mortgages, as well as various investing and finance topics.
- The Balance: Offers advice and insight about personal finance, including detailed articles about commercial mortgages.
- NerdWallet: A great site to compare and understand various commercial mortgage lenders, their rates and much more about finance.
