What is the mortgage constant in commercial real estate loans?
The loan constant, also known as the mortgage constant, is the calculation of the relationship between debt service and loan amount on a fixed rate commercial real estate loan. It is the percentage of the cash paid to service debt on an annual basis divided by the total loan amount.
For example, a 20-year amortizing loan of $1,000,000 with a 6 percent interest rate would incur $85,972 in annual payments . The loan constant is calculated by dividing $85,972 into $1,000,000, or 8.5972 percent.
The loan constant only applies to fixed rate loans or mortgages . In the event the interest rate is variable, there is no way to accurately predict the lifetime debt service on a loan, although it may be possible to calculate a constant for those periods of the debt's life that the interest rate is locked in.
Using the following formula, you can easily calculate the Loan Constant: