Planner: Cover yourself with capital

By Manulife

A major benefit to owning commercial property is that your equity can become a source of financing. The key to finding (or adapting) the right commercial mortgage, however, is to be as upfront about your entrepreneurial needs as possible. “With financing of any kind, you’ve got to consider your current needs, future needs, seasonal variations and cash flow,” says George Grainger, Portfolio Manager, Manulife Bank, in Waterloo, Ontario. “You don’t want to fall into the trap of being too narrowly focused on just the mortgage.” Get the most from your mortgage by raising these questions.

How much will be available as a credit line?

Having a portion of your commercial mortgage available, as a credit line is invaluable if you need to, say, buy out a competitor, make a major hire or you have a slow month. And when you have surplus funds, you can pay down the principal without penalties. “It gets your lazy money working for you,” says Tim Nadelle, Director, Small Business & High Net Worth Solutions, Manulife Bank. An all-in-one account, available at only a few financial institutions in Canada, consolidates your commercial mortgage, business lending, interest earning and chequing accounts.

If I lock in a portion of my mortgage, what are my prepayment options?

When interest rates are low, it can make sense to lock in a portion of your entire commercial mortgage. But, it’s important to ensure you can pay some of it down early when your cash flow swings upward. Some financial institutions will allow you to prepay a portion of a fixed term with no prepayment penalty, while others will charge a prepayment penalty. Others simply won’t allow any prepayment at all. With that in mind, it’s crucial to find out exactly what commitment may be on your locked-in portion and what the prepayment options are.

How will you protect against rising interest rates?

While it’s a solid tactic to lock in a portion of your commercial mortgage for five years when interest rates are low, if rates rise rapidly in year four, your mortgage may come due at a time when rates are high. Nadelle suggests you consider mitigating this risk by staggering maturity dates on segments of your mortgage over time, “sort of like a GIC ladder in reverse,” he says. Ask your lender if there are ways to diversify the interest rate risk, and what he or she recommends.