How a commercial mortgage differs from a residential one
Most of the surprises come from one root difference. Everything else follows from it.
The short answer
A residential mortgage is underwritten on you and a commercial mortgage is underwritten on the property. That single difference drives almost every other one, from the size of the down payment to the length of the amortization to whether you can pay it out early. In Canada the line sits at five units.
| Residential | Commercial | Why it differs |
|---|---|---|
| You are underwritten: income, credit and personal debt | The building is underwritten: its net operating income | The commercial lender expects to be repaid by the property |
| Personal debt service ratios against your income | Debt service coverage on the property's income | Coverage, not your salary, sets the loan amount |
| A smaller equity contribution set by residential rules | 25 to 35 percent of value on a conventional purchase | The lender wants more equity in front of it on income property |
| Amortized to the full payoff of the loan | 20 to 25 years conventionally, up to 40 on qualifying insured multifamily | Amortization is a lever on coverage and therefore on proceeds |
| Renewed repeatedly until the loan is retired | Typically a 5 year term with a large balance outstanding at maturity | Every commercial term ends in a refinance decision |
| A published penalty formula you can look up | Frequently closed, or priced to make the lender whole on its expected interest | Commercial exits are negotiated at commitment, not at payout |
| Little or no third party reporting beyond a valuation | Appraisal, often an environmental report, sometimes a building condition assessment, paid by you | The lender is buying an independent view of the asset it is lending against |
The five unit line, and why it matters more than people expect
As our pillar overview sets out, the line on residential property sits at five units. Four and under is underwritten as residential. Five and up is commercial, and the building's income carries the file.
This is the single most common surprise for someone buying their first small apartment building. Nothing about the property feels commercial. It is residential tenants in residential suites on a residential street. The financing does not care. Crossing the line changes which lenders will look at it, what test they apply, and what you have to produce before anyone will quote.
Practically, that means a rent roll and operating statements instead of pay stubs, a commercial appraisal instead of a residential one, and a term and amortization structure you have not seen before. It is not harder. It is different, and it is worth knowing before you write an offer.
Your income stops mattering and the building's income starts
On a residential file your income is the engine. On a commercial file it is context. The lender still wants to know you are solvent, has a view on your net worth and liquidity, and will usually want a personal guarantee. But the loan amount comes off the property's net operating income tested against a coverage requirement. The commercial mortgage calculator shows exactly how that arithmetic sets the ceiling.
For a lot of borrowers this works in their favour, and the clearest case is the self employed owner whose taxable income looks nothing like their real cash flow. On the residential side that gap is a problem to be explained. On the commercial side the question moves to the building. Self employed commercial mortgages covers how that plays out.
What surprises residential buyers most
A short term against a long amortization. A five year term on a 25 year amortization leaves a substantial balance outstanding at maturity. Every commercial term ends in a decision about what happens next.
Third party reports, and who pays. An appraisal, often an environmental report, sometimes a building condition assessment. They are conditions of approval, not optional extras, and the cost lands on you before you know the answer.
Personal guarantees. Most conventional commercial lending in British Columbia is recourse lending. Owning the property inside a company does not on its own remove your name from the covenant.
Prepayment terms nothing like a residential penalty. Many commercial loans cannot be prepaid at any price for part of the term, and where they can, the charge is built to make the lender whole. Prepayment penalties covers the mechanisms.
Renewal is not automatic. The lender re underwrites the property and the borrower at maturity, and a building that has weakened can be offered worse terms or no offer at all. Commercial mortgage renewal explains why the work starts six months out.
Commercial versus residential.
Related reading
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