Most investors start with residential mortgages. You buy a house, a duplex, maybe a fourplex. The bank looks at your income, your debts, runs the stress test, and tells you how much you can borrow. That system works fine — until it doesn’t.
At some point, the residential financing system stops working for you. Your debt ratios are maxed. The stress test kills your buying power. You want to buy a 12-unit apartment building but the bank says it does not fit their residential program.
That is when commercial financing enters the picture. And here is what most investors do not realize: commercial mortgages are not just for millionaires buying skyscrapers. They are a completely different system with different rules — and in many cases, those rules actually work in your favor.
Let me walk you through every meaningful difference between commercial and residential mortgages in Canada, so you know exactly what changes when you cross that line.
The Side-by-Side Comparison
Before we dig into the details, here is the full comparison at a glance.
| Feature | Residential Mortgage | Commercial Mortgage |
|---|---|---|
| Property types | 1-4 units | 5+ units, office, retail, industrial |
| Qualification method | Personal income + stress test | Property income (DSCR / NOI) |
| Stress test | Yes — qualify at contract rate + 2% or 5.25% floor | No federal stress test |
| Down payment | 5-20% (insured/uninsured) | 5-50% (varies by type and program) |
| Interest rates | Lower (insured from ~4-5%) | Higher (typically 0.5-2% above residential) |
| Amortization | 25-30 years | 20-50 years (CMHC MLI Select up to 50) |
| Term length | Typically 5 years | 3-10 years |
| Personal guarantee | Always | Usually required, sometimes limited |
| Lender options | Banks, credit unions, monolines | Banks, credit unions, life companies, private |
| Appraisal method | Comparable sales | Income approach (cap rate / NOI) |
| Closing timeline | 30-45 days | 45-90 days |
| Prepayment flexibility | Governed by contract (10-20% annual) | Often more restricted |
That table tells the broad story, but the real differences play out in ways that directly affect how you build your portfolio. Let me break down each one.
How Qualification Actually Works
This is the single biggest difference, and it is the one that matters most for investors.
Residential: Your Income Is the Ceiling
When you apply for a residential mortgage, the lender calculates your Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio based on your personal income. They add up your housing costs, your car payments, your credit card minimums, your student loans — everything.
Then they apply the stress test. You do not qualify at the actual mortgage rate. You qualify at the higher of 5.25% or your contract rate plus 2%. On a 4.5% mortgage, you are being stress-tested at 6.5%.
The result is that your personal income puts an absolute ceiling on how much you can borrow. It does not matter if the property cash flows beautifully. If your personal debt ratios are maxed, the bank says no.
For most investors, this wall hits somewhere between property four and property eight. Your income has not changed, but your total debt keeps climbing with each purchase. Eventually the math stops working.
Commercial: The Property Is What Matters
Commercial lending flips the script entirely. Instead of asking “How much does this person earn?”, the lender asks “How much does this property earn?”
The key metric is the Debt Service Coverage Ratio (DSCR). The lender takes the property’s Net Operating Income (NOI) — that is all rental revenue minus operating expenses — and divides it by the annual mortgage payment. If the result is above the lender’s minimum threshold (typically 1.20 to 1.30), the deal works.
There is no federal stress test on commercial mortgages. The property stands on its own.
This means an investor whose personal debt ratios are completely maxed out can still qualify for a commercial mortgage — as long as the building generates enough income. This is how investors break through the ceiling that residential debt ratios impose and keep scaling.
You can test whether a property’s income supports commercial financing using the Canadian DSCR loan calculator, or try our DSCR Loan Calculator — Canadian Edition to run the numbers quickly on any investment property.
Find Out If Your Property Qualifies
The Four-Unit Ceiling Problem
In Canada, the line between residential and commercial financing is drawn at five units. Properties with one to four units fall under residential rules. Properties with five or more units are commercial.
This creates what I call the four-unit ceiling problem.
An investor buys a single-family rental. Then a duplex. Then a fourplex. Each purchase eats into their personal debt ratios. After three or four properties, the bank runs the stress test and says they are done. No more residential mortgages.
But the investor does not need to stop buying. They need to change the type of property they buy.
A six-unit or eight-unit apartment building qualifies under commercial rules. The property’s income — not the investor’s personal income — drives the qualification. If the building cash flows well, the investor’s maxed-out personal debt ratios become largely irrelevant.
This is counterintuitive. You would think bigger properties would be harder to finance. In reality, the switch from residential to commercial can make financing easier because you are no longer limited by your personal income.
Interest Rates: Yes, They Are Higher (But Context Matters)
Commercial mortgage rates in Canada typically run 0.5% to 2% higher than residential rates. On a $2 million building, an extra 1% translates to roughly $20,000 per year in additional interest.
That sounds expensive. But consider the context.
Commercial properties generate significantly more income than residential ones. A 12-unit apartment building has twelve revenue streams. The higher rate is offset by higher income. And because you avoid the stress test, you can often borrow more money at a commercial rate than you could at a lower residential rate.
Also, CMHC-insured multi-family mortgages get preferential commercial rates. Through the MLI Select program, rates can be surprisingly close to residential levels because CMHC’s backing reduces the lender’s risk.
The bottom line: do not compare rates in isolation. Compare total borrowing power and total cash flow across the deal.
Amortization: The Hidden Advantage
Residential mortgages in Canada typically amortize over 25 years. First-time buyers can now access 30-year amortizations under certain programs.
Commercial mortgages offer more flexibility. Standard amortizations are 20-25 years. But CMHC MLI Select multi-family mortgages can go up to 50 years.
A 50-year amortization dramatically reduces your monthly payment. On a $3 million mortgage at 5%, your monthly payment drops from roughly $17,500 (25-year amortization) to about $13,500 (50-year amortization). That $4,000 per month difference improves your cash flow and makes your DSCR ratio stronger.
The trade-off is that you build equity more slowly and pay more interest over the life of the loan. But for investors focused on cash flow and scaling, the lower payment is usually worth it.
Down Payment Differences
Residential down payments in Canada follow clear rules:
- Owner-occupied: 5% minimum (CMHC insured)
- Investment property (1-4 units): 20% minimum (not insurable)
Commercial down payments vary widely:
- CMHC MLI Select multi-family: 5-15%
- Conventional multi-family: 20-35%
- Office, retail, industrial: 25-35%
- Development land: 35-50%
The surprise for most investors is that CMHC commercial financing can actually require a lower down payment than a residential investment property. A 20-unit apartment building with CMHC insurance at 5% down requires less cash percentage-wise than a single duplex at 20% down.
Compare Your Down Payment Options
The Appraisal Difference
How the property is valued affects everything.
Residential appraisals use the comparable sales approach. The appraiser looks at what similar properties in the area sold for recently. Your property’s value is based on what the market says houses like yours are worth.
Commercial appraisals primarily use the income approach. The appraiser looks at how much income the property generates, applies a capitalization rate, and calculates value from there. A building generating $200,000 in NOI with a 6% cap rate is worth approximately $3.33 million — regardless of what the house next door sold for.
This matters because commercial property owners can directly increase their property’s value by increasing income. Raise rents, reduce vacancies, cut expenses — your NOI goes up, and your property value goes up with it. This is called forced appreciation, and it is one of the most powerful wealth-building tools in commercial investing.
With residential properties, you are mostly at the mercy of the broader market.
When to Make the Switch
There is no single right time to move from residential to commercial. But here are the signals that it is time.
Your debt ratios are maxed. If your lender says you cannot qualify for another residential mortgage, commercial financing based on property income may solve the problem immediately.
You want to scale faster. Buying one duplex at a time is slow. A 12-unit building adds twelve units to your portfolio in a single transaction.
You are hitting the stress test wall. The federal stress test can kill deals that make perfect sense on paper. Commercial mortgages avoid this entirely.
You want more control over property value. With commercial, your property’s value is tied to its income. You can directly influence that number through management decisions.
You are comfortable with higher complexity. Commercial deals involve more moving parts: environmental assessments, commercial appraisals, longer due diligence periods, and more complex lease structures. Make sure you have the team to handle it.
Hybrid Scenarios Most Investors Miss
The line between residential and commercial is not always clean. Here are situations that confuse people.
A fourplex with a legal secondary suite. If the suite makes it five units total, it might qualify as commercial in some jurisdictions, but many lenders still treat it as residential. Clarify with your broker.
A mixed-use building with four residential units and one commercial unit. This often falls into commercial territory. The commercial component changes the lending category even though the residential units outnumber it.
Converting a large house into five rental rooms. Room-by-room rentals can sometimes be structured as commercial, especially with programs like PadSplit. But lender acceptance varies widely.
Purchasing a five-unit building with residential financing. Some lenders will finance a five- or six-unit building under residential rules if it is structured as individual units (like a condo or townhouse complex). This is rare but possible.
The key takeaway: talk to a broker who handles both residential and commercial before making assumptions about which category your deal falls into. If you want to explore commercial mortgage products across all property types, a specialized broker can show you options you didn’t know existed.
Why Commercial Can Actually Be Easier
This goes against everything most investors assume. But once you understand the mechanics, it makes sense.
With residential financing, the lender’s stress test artificially limits your borrowing power. You might be able to comfortably afford the payment, but the stress test says otherwise. Your income is fixed, and the stress test formula does not care about your property’s performance.
With commercial financing, the property speaks for itself. A well-performing building with strong NOI and a healthy DSCR ratio qualifies on its own merits. You are not fighting an artificial qualification formula.
Of course, commercial is not without challenges. The documentation is more complex. Closing takes longer. Rates are higher. And you typically need a larger down payment for non-multi-family properties.
But for investors who have built a track record and are ready to scale, commercial financing often opens doors that residential mortgage programs cannot.
Plan Your Switch to Commercial Financing
Frequently Asked Questions
At what number of units does a mortgage become commercial in Canada?
Is the mortgage stress test applied to commercial mortgages?
Are commercial mortgage rates always higher than residential rates?
Can I qualify for a commercial mortgage if I have never bought commercial property before?
Should I jump straight to commercial or start with residential properties first?
Disclaimer: LendCity Mortgages is a licensed mortgage brokerage, and our team includes experienced real estate investors. While we are qualified to provide mortgage-related guidance, the broader financial, tax, and legal information in this article is provided for educational purposes only and does not constitute financial planning, tax, or legal advice. For matters outside mortgage financing, we recommend consulting a Chartered Professional Accountant (CPA), licensed financial planner, or qualified legal advisor.
Written by
LendCity
Published
February 8, 2026
Reading Time
10 min read
Commercial Mortgage
Financing for commercial properties like retail, office, or multifamily buildings with 5+ units, with different qualification criteria than residential mortgages.
DSCR
Debt Service Coverage Ratio - a metric that compares a property's net operating income to its mortgage payments. A DSCR of 1.25 means the property generates 25% more income than needed to cover the debt. Lenders typically require a minimum DSCR of 1.0 to 1.25 for investment property loans.
NOI
Net Operating Income - the total income a property generates minus all operating expenses, but before mortgage payments and income taxes. Calculated as gross rental income minus vacancies, property taxes, insurance, maintenance, and property management fees.
Mortgage Stress Test
A federal requirement to qualify at the higher of your contract rate +2% or the benchmark rate (around 5.25%). For investors, rental income can be used to offset this calculation, though lenders typically only count 50-80% of expected rent.
LTV
Loan-to-Value ratio - the mortgage amount expressed as a percentage of the property's appraised value or purchase price (whichever is lower). An 80% LTV means you're borrowing 80% and putting 20% down. Lower LTV generally means better rates and terms.
Amortization
The period over which a mortgage is scheduled to be fully paid off through regular payments of principal and interest. In Canada, common amortization periods are 25 or 30 years, though the mortgage term (when you renegotiate) is typically 1-5 years.
Interest Rate
The cost of borrowing money, expressed as a percentage. It determines how much you pay on top of the principal borrowed.
Down Payment
The upfront cash payment when purchasing a property. For 1-4 unit investment properties, minimum 20% down is required. 5+ unit multifamily can use CMHC MLI Select with lower down payments, and house hackers can put as little as 5% down on owner-occupied 2-4 plexes.
Underwriting
The process lenders use to evaluate the risk of a mortgage application, including reviewing credit, income, assets, and property value to determine loan approval.
Multifamily
Properties with multiple dwelling units, from duplexes to large apartment buildings. Often offer better cash flow and economies of scale.
Secondary Suite
A self-contained rental unit within or attached to a single-family home, such as a basement apartment, laneway house, or garden suite. Secondary suites help investors generate additional rental income from one property and can qualify for rental offset programs that improve mortgage qualification.
Hover over terms to see definitions, or visit our glossary for the full list.