How Commerical Loans Work

Ever wonder how commercial loans work in comparison to residential loans? It's one of the common questions I get asked. Let's get into it. 

Understanding the Basics

Here are some basics about commercial mortgages:

• Usually require 20-30% down of the sale price

• Most mortgages have FIXED term rates.  

• Typically fixed terms are 5, 7, or 10 years (This can sometimes be longer.)

• Usually, the Amortization Period is 20 years. This means that although your bank has a FIXED period of time for the loan, the loan payments will spread out over the years of the amortization schedule.

• You’ll pay principal + interest on the remaining balance of the loan, after the down payment. Your bank will determine this rate. 

Commercial vs Residential Loans

One of the main differences between commercial mortgages and residential mortgages is the length of the loan.

When the end of the term happens, the bank will require some action to be taken. Banks will use this as an opportunity to see what the current rate environment looks like, how the property is performing, etc. 

At this time, you’ll have some options to explore:

• Do a new loan with the same bank (refinance)

• Sell the property 

• Find a new bank to do a similar loan structure 

Commercial Loan Example

Let's put this into practice with an example of a $1,000,000 property. 

• Down Payment: $300,000 (30%)

• Term: 5 Years Fixed 

• Rate: 6.75%

• Amortization: 20 Years 

• Monthly Payment: $5,332.55 

• Balance at the end of the initial 5-year term: $601,479.3