One year of loan payments divided by the loan amount, shown as a percent. It folds the interest rate and the amortization period into a single number.
The loan constant is annual debt service divided by the loan amount. On an interest-only loan it equals the interest rate. On an amortizing loan it is higher than the rate, because each payment also repays principal, and a shorter amortization raises it.
Example: a $1,000,000 loan at 7 percent, amortized over 25 years, has a monthly payment of about $7,068, or $84,814 a year. The constant is 8.48 percent.
Lenders use the constant to turn income into a loan amount: the loan equals net operating income, divided by the required coverage ratio, divided by the constant. Income of $150,000 at 1.25 coverage and an 8.48 percent constant supports about $1,415,000. The same arithmetic shows that coverage equals debt yield divided by the constant.
HUD’s guide for multifamily underwriters uses it as a check on value: a cap rate should generally exceed the mortgage constant, and one below it calls for a closer look. When two quotes differ in both rate and amortization, comparing their constants shows which one carries the lighter yearly payment.
How it shows up in the data here
Not in any public file. No filing here carries a loan's payment or its constant. The tools work it out for you: the amortization and balloon calculator gives the yearly payment for a rate and term you enter, and the maximum loan calculator uses it to size a loan against a coverage ratio.
Go further
- Amortization and balloon calculator: The payment, and so the constant, for a rate and amortization you enter.
- Maximum loan calculator: The loan a given income and coverage ratio support.
- Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
- Maximum loan calculator: The loan each test allows: DSCR, LTV and debt yield side by side, and which one binds.
- DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- Debt service coverage ratio (DSCR): Net operating income, or business cash flow, divided by the loan payments due in a year. It shows how many dollars come in for each dollar of debt service.
- Debt yield: Net operating income divided by the loan amount, shown as a percent. It measures how much income stands behind each dollar lent, whatever the rate or term.
- Capitalization rate (cap rate): A property's stabilized net operating income divided by its price or value. Divide income by the cap rate and you get an estimate of value.
- Amortization: The schedule on which a loan's principal is paid down through regular payments. The amortization period sets the payment size and can be longer than the loan's term.
- Interest-only (IO): A loan, or a stretch of a loan's term, in which payments cover interest alone and the principal balance does not go down.
- Net operating income (NOI): A property's annual income minus its operating expenses, before loan payments, income taxes and depreciation. It is the top number in DSCR and debt yield.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.