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Selecting the Best Commercial Mortgage Term

May 16, 2023

When considering your options for a commercial mortgage, there are many factors to think about. How much funding you require, what the interest rate will be, how long you intend to hold your commercial real estate investment, what are the required documents for your mortgage application, and how long the overall process will take. Another key decision you will need to make is what term to select.

Commercial Mortgage Terms

To best facilitate our client’s needs, MCAP offers commercial mortgage terms from 1 – 10 years. We also offer a Multi Family short-term bridge program to facilitate quick close purchase transactions, complete final lease-up activity and facilitate timely repayment of construction debt.

For clients who require short-term flexibility to complete re-leasing, complete capital repairs, prepare an asset for redevelopment, improve cashflow or release equity to fund subsequent acquisitions we also have our Conventional Bridge Program offering terms of 1 – 3 years.

For stabilized, purpose-built rental apartment buildings, the most competitive form of financing is available through Canada Mortgage & Housing Corporation (CMHC).

While other loan terms are available, the most common and most price competitive remains 5- and 10-year term. Both options have their benefits, essentially it all comes down to what will work best in your situation.

Benefits of a 10-year Commercial Mortgage Term

Stability and Predictability

1. Stability and Predictability
For real estate owners, long-term stability and predictability are important factors, both of which favour a 10-year mortgage term. Knowing exactly what to expect in terms of financing costs for the next 10 years greatly assists our clients in managing and forecasting their cashflows while insulating against any short-term interest rate volatility.

Stability and Predictability Flexibility

2. Flexibility
Should a client wish to access the equity they have created in their property, they can do so at any time during the term of the existing loan by utilizing top-up financing. This gives the borrower the ability to leave their current 10-year mortgage in place at the fixed rate, while accessing a new loan on the same property at a different interest rate and term without needing to wait until the current 10-year mortgage reaches maturity.

If our client decides to sell their property during the term of the loan, having a long-term mortgage with an attractive fixed rate in place can actually enhance the desirability of the asset and aid with the final sale. This is due to MCAP having the ability to facilitate a loan assumption whereby a qualified new purchaser can step into the shoes of the existing borrower under the same mortgage terms. MCAP has facilitated numerous transactions of this type smoothly and efficiently.

Benefits of a 5-year Commercial Mortgage Term

Lower Cost

1. Lower Cost
A 5-year commercial mortgage term offers the flexibility of a shorter term. If you’re looking to mortgage a property in a higher-rate environment, choosing a shorter mortgage will typically give you the ability to access a lower interest rate. Should interest rates decrease further, a 5-year mortgage will also grant the ability to access the lower rate sooner.

Lower Cost Flexibility

2. Flexibility
For clients who have a shorter-term view or are contemplating the sale of an asset, a 5-year mortgage term may be beneficial. Should the party acquiring not wish to assume the existing mortgage, the client can pay a prepayment penalty to exit the mortgage term early. A lower prepayment penalty is payable on a shorter-term mortgage, which is another benefit of selecting a 5- year commercial mortgage term.

Choosing Your Best Option

Which term you opt for will depend greatly on your future plans for the property. In addition, many of our clients have large real estate portfolios which require careful planning so as to best manage interest rate risk across their various mortgages. Each mortgage term comes with its own set of benefits. The MCAP Commercial Mortgages Team can help you navigate which solution is best for you in the context of your overall financing needs and strategy. Contact our team to start a conversation today!

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