Loan Constant Calculator (Mortgage Constant)

How it works

Loan constant K = payments per year × i ÷ (1 − (1 + i)⁻ⁿ), with i = annual rate ÷ payments per year and n = years × payments per year · annual debt service = K × loan · positive leverage when cap rate > K

The loan constant (mortgage constant) is the annual principal-and-interest payment divided by the loan amount. Commercial real-estate lenders and investors use it to size loans — annual debt service is simply loan × constant — and to test leverage: if a property’s cap rate (NOI ÷ value) is above the loan constant, each borrowed dollar earns more than it costs and debt raises the equity return; if it is below, leverage is negative. The constant is always higher than the interest rate because it includes principal repayment.

Worked example

At 7% with 25-year monthly amortization, the payment per 1,000 borrowed is 7.07 a month, so the loan constant is 12 × 7.0678 ÷ 1,000 = 8.481%. A 1,000,000 loan therefore costs 84,813.50 a year (7,067.79 a month). With a 7.5% cap rate below the 8.481% constant, leverage is negative — borrowing lowers the return on equity.

Sources: Investopedia — Loan constant · Wikipedia — Mortgage constant

Frequently asked questions