Commercial Mortgage Quick Reference Guide

Loan Constant

Loan constant, also known as mortgage constant, is a percentage which compares the entire amount of a loan by its annual debt service. In order to determine a property's loan constant, a borrower will need to know information including the term, interest rate, and amortization of a loan.

Loan Constant Formula

The formula for loan constant is:

Mortgage Constant = Annual Debt Service/Loan Amount

For instance, a 20-year, fully amortizing loan of $2,000,000 with a 5 percent interest rate would incur $158,389 in payments each year, with a loan constant of 7.9%.

$158,389/$2,000,000 = 7.9%

If you only have the mortgage constant and the principal loan payment, you can multiply the mortgage constant by the principal in order to determine the monthly payment on the loan:

$2,000,000 * 7.9% = $158,000 (rounded)

Loan constant cannot be applied to adjustable or variable rate commercial mortgages, since the constant change in interest rates makes it impossible to determine an accurate loan constant. In general, loans with lower loan constant are generally more profitable for borrowers.

The Relationship Between Loan Constant and Cap Rate

Comparing a property’s loan constant with its cap rate is one of the best ways to determine whether it will be profitable. A property with a loan constant that exceeds its cap rate will lose money, will a property with a cap rate higher than its loan constant will lose money. For example, if we take the property in the example above, and say that it’s generating $185,000 a year in net operating income, we would calculate it’s cap rate like so:

$2,000,000/$185,000 = 10.8%

Since, in this case, the cap rate is higher than the loan constant, the property would be profitable.

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