On several occasions, I have come across a number of commercial mortgage borrowers who are somehow interested to find out how exactly, we as lenders, determine the commercial mortgages rates Toronto that we are giving them. But to shed some light on this gray area and to give everyone some idea on how we arrive at such figures on rates, here is what I usually say to them. Lenders have several criteria to use when it comes to determining the rates for each and every commercial mortgage loan application that we receive. However, it is necessary that we make a careful evaluation of all the involved risk first. There is nothing unusual to it but all mortgage loan applications may have a number of risks involved in them and can’t be dealt away with by the lender.
In order to protect the interest of both parties, the relative risk that usually comes with a loan application is carefully evaluated. If a particular loan application is perceived to have minimal risk, it is likely to receive smaller rates of interest. If it’s another way around and the perceived risks are higher, the higher the interest rates will be. I believe that somehow, it works to the advantage of mortgage borrowers that they have a good understanding of what is important to underwriters and lenders.
Borrower Qualifications
It is a must for lenders to take a look at the mortgage loan borrower’s or at the guarantor’s net worth, credit history and rating, cash flow, liquidity, and even his real estate exposure and experiences will also be taken into account, prior to paying attention to his mortgage loan application. This aspect is important in determining all the possible risks that are involved in a commercial mortgage loan application. It is important that lenders and even the more stable financial institutions would agree, that seeing first that a commercial mortgage loan borrower has a good background or history in owning as well as managing similar properties. In the eyes of the lender, this is very helpful when trying to determine if the mortgage borrower has a good reputation or brings with him high risks.
It is also important for lenders to see that a loan borrower has sufficient cash reserves with him in case that unforeseen issues or events come along the way. Additionally, when trying to establish a borrower’s reputation, it is important to see that he has a good track record and punctual enough in paying his utility bills such as phone, electric, the Internet, water, credit card, etc.
Tenant Mix
When it comes to financing retail properties and offices, it is a desirable deal for lenders to come across a mortgage application that has a multi-tenanted property. If it has an observable long-term lease and good quality tenants, it’s almost assured of getting the loan application approved. If the lender sees any of these, everything else regarding the process will be almost like a formality.
High turnover rate, vacancy, and a steady state of flux are among the top things that are a turnoff to a lender. These are the things that they actually detest to see with a mortgage loan application because it is almost automatically a turndown for them when they see such things. What’s very important for lenders is that they see that your property is able to attract long term tenants and that you are able to maintain them well.
Property Condition
Lenders would consider properties with little-deferred maintenance a lower risk deals as opposed to those types that require a major renovation or capital improvements. If a particular property is in a very poor condition, it will necessitate the lender to set aside a good amount of money or have an escrow fund that is dedicated for the purpose of repairing and long-term maintenance of the property. If a property is found to be in bad shape and is not well maintained, it can’t be expected of them to really perform well. The opposite can be said to be true when it comes to properties that are well kept and properly maintained. It is safe to say that they are able to offer lenders more value instead.
Debt Coverage
What this part pertains to is when you have an observable excess in the net operating income versus the annual mortgage payments. It is believed that there is a much lower risk if a property is producing more excess cash flow. The funds collected from the excess of cash flow can be utilized to help minimize the possibility of turnover, cash drains, or repairs.
Stabilized Occupancy
As much as possible, what we as lenders are trying to look for are those commercial real properties that have a proven track record of high level of occupancy within the last 3 years. We qualify a property that has an observable fluctuating rental histories and high vacancy rate as a high-risk investment. Therefore, mortgage applications for such type have a very slim chance of getting approved. We require applicants for mortgage financing to furnish us a copy of their most recent operating statements, specifically their records for the last 2-3 years. Specifically what we need to see is that the property in question has a steady occupancy with an observable increasing net income. If it goes the other way around and has a fluctuating expense and income, it will not be good as it will cast a shadow of doubt on the part of a lender. Such commercial properties will have a hard time getting approved for their mortgage applications because they are expected to generate a lot of questions.
Property Location and Market
As lenders, we perceive the good properties found in metropolitan and suburban areas as low risk as opposed to the inferior properties that are found in rural locations. It is because it is a lot easier to find another tenant for a good property that is situated in urban areas or when the remaining lease term for it is running short, you can easily find another tenant for it soon after the current one has moved out. To better illustrate what I mean here, let me cite an example. If you happen to have a property that is not situated in a good location, you may need to do something about it to attract tenants and the least anyone can do is to have the structure renovated or repaired. This will help increase its market value but you can’t really make it compete with similar properties in good locations.
The moment that you have found suitable commercial mortgage rates Toronto, it would be very convenient on your part to know in advance the proposed monthly payment that you will have. At this stage, you will find a mortgage calculator very useful for this purpose. Regardless if you are intending to purchase a commercial office building, or you want to refinance the currently active loan that you have, it will work to your advantage to know and determine exactly how much of a loan would be most affordable to you with respect to the currently prevailing rates.
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