When purchasing commercial property in Canada, securing the right mortgage can be a game-changer for your business. However, applying for a commercial mortgage can be complex and has potential pitfalls. Many business owners and investors make mistakes that can hinder their chances of getting the best deal or, in some cases, having their mortgage applications rejected.
Learn these top five commercial mortgage mistakes and receive practical advice on how to avoid them. By being aware of these mistakes, you can ensure your mortgage application is smooth and successful.
1. Neglecting to Prepare Your Financials Properly
One of the most common mistakes when applying for a commercial mortgage is failing to prepare your financials thoroughly. Lenders want to know that you have a solid business plan, a stable income and the ability to repay the loan. If your financial documents are incomplete, outdated, or inaccurate, it can raise red flags and delay the approval process.
- Prepare financial statements: Manage your balance sheet, income statement and cash flow projections for the past two years.
- Ensure accuracy: Double-check your documents to reflect your current financial situation.
- Personal tax returns: Lenders may ask for this information to assess your personal and business financial health.
How to Avoid This Mistake: Before applying for a commercial mortgage, take the time to organize your financial statements. This includes your cash flow, balance and income statement projections for at least the past two years. Lenders also typically request personal and business tax returns and details about any existing business debts or liabilities. Be prepared to show not just your current financial health but also your projections for the future, especially if you’re seeking a loan for expansion.
Having a commercial mortgage agent by your side can help you prepare these documents correctly. They can guide you on what specific lenders look for, which can make the application process more streamlined.
2. Overlooking the Importance of Your Credit Score
Your credit score is king when securing a commercial mortgage. While business owners may assume that their business’s financial health matters, lenders also want to assess the creditworthiness of the individual behind the company. A low credit score can be a roadblock when applying for a commercial mortgage.
- Understand credit score requirements: Know what credit score is needed for commercial mortgage approval.
- Improve your score if needed: Paying down personal debt and resolving credit issues can help increase your score.
- Check for errors: Ensure that no differences in your credit report could affect your score.
How to Avoid This Mistake: Start checking your credit score if you are going to apply for a commercial mortgage. If you discover that your credit score is low, take steps to improve it. This may include paying off existing personal debt, ensuring all payments are made on time and resolving any pending issues with your credit report. A higher credit score can give you better loan terms and interest rates, so it’s worth taking the time to make necessary improvements before applying for a mortgage.
3. Choosing the Wrong Type of Commercial Mortgage
Various commercial mortgage types are available, such as fixed-rate, variable-rate and interest-only loans. Each has advantages and disadvantages, depending on your business’s financial situation and long-term goals. Many applicants make the mistake of choosing the wrong type of mortgage, leading to higher costs, unexpected rate changes, or economic strain down the road.
- Fixed-rate mortgage: This offers stability with consistent monthly payments.
- Variable-rate mortgages may offer lower initial payments, but rates can fluctuate.
- Interest-only mortgage: Allows lower initial payments but can result in higher costs later.
How to Avoid This Mistake: Take time to fully understand the types of mortgages available before deciding. A fixed-rate mortgage offers stability, as your payments will be the same throughout the loan’s term.
On the other hand, a variable-rate mortgage may offer lower initial payments but could increase over time, depending on market conditions.
An interest-only mortgage may appeal to businesses with fluctuating cash flows or those in the early stages of growth. It allows you to focus on paying down interest rather than the principal. However, this can lead to larger payments later on, so it’s essential to plan carefully.
A mortgage broker can help you analyze your business’s unique financial situation and recommend the best mortgage product to support your goals.
4. Failing to Shop Around for the Best Lender
It’s easy to assume that the first lender you approach will offer the best terms, but this isn’t always true. Lenders have different criteria and offer different rates and terms; some may be more flexible. Failing to shop around or compare multiple lenders can result in you accepting unfavourable loan terms that may not align with your financial needs.
- Compare rates and terms: Not all lenders offer the same interest rates or loan structures.
- Look at lender flexibility: Some lenders may offer more flexibility when negotiating loan terms.
- Consider alternative lenders: Don’t limit your options to traditional banks; consider credit unions and trusted online lenders, too.
How to Avoid This Mistake: Don’t settle for the first offer you receive. Take the time to research and compare different lenders, including traditional banks, credit unions and alternative lenders. Each lender may have different strengths or offer better rates for specific business types.
5. Ignoring the Hidden Costs and Fees
When applying for a commercial mortgage, it’s important to account for all the associated costs and fees. These hidden costs can include appraisal fees, legal fees, closing costs and insurance premiums. Many applicants make the mistake of only focusing on the principal loan amount and interest rates without fully considering the additional financial burden that can arise during the mortgage process.
- Appraisal fees: These are required to assess the commercial property’s value.
- Legal and closing fees: These are often overlooked but are necessary for the transaction to be completed.
- Insurance premiums: These are essential to protect your property and your lender.
How to Avoid This Mistake: Before finalizing your mortgage application, ask the lender for a detailed breakdown of all fees and costs associated with the loan. This will give you a clear understanding of the total cost of borrowing and help you avoid any unpleasant surprises. A mortgage broker can assist you in identifying and negotiating some of these fees, potentially saving you money in the long run.
In addition to fees, you should also factor in the cost of maintenance, property taxes, and insurance. Ensure you’re financially prepared for these ongoing expenses so you don’t overextend your business’s budget.
Conclusion
When applying for a commercial mortgage, you must make a financial decision that requires careful planning and preparation. By avoiding these common commercial mortgage mistakes—such as neglecting to prepare your financials, overlooking the importance of your credit score, choosing the wrong type of mortgage, failing to shop around for the best lender, and ignoring hidden fees—you can increase your chances of securing a favourable loan.
Working with a knowledgeable commercial mortgage broker can be invaluable in navigating the complexities of the mortgage process and ensuring that you make informed decisions that support your business’s growth and financial health. Whether you want to expand or purchase a new property, the right mortgage can help you achieve your goals while avoiding costly mistakes.