Definition
The Mortgage Constant (also known as the Debt Constant) is the ratio of a loan’s annual debt service to its total loan amount.
It shows the percentage of the original loan balance that must be paid each year to fully amortize the loan.
Formula
Mortgage Constant = Annual Debt Service ÷ Loan Amount
Example:
- Loan Amount: $4,000,000
- Annual Debt Service: $300,000
Mortgage Constant = $300,000 ÷ $4,000,000 = 7.50%
Key Characteristics
- Includes both principal and interest.
- Always higher than the stated interest rate on amortizing loans.
- Equal to the interest rate for interest-only loans.
- Determined by interest rate and amortization period.
Why It Matters
Investors use the mortgage constant to quickly compare financing costs to a property’s yield (such as the cap rate).
- If Cap Rate > Mortgage Constant → Positive leverage.
- If Cap Rate < Mortgage Constant → Negative leverage.
Connection to DSCR
The Debt Service Coverage Ratio (DSCR) can be expressed using the mortgage constant:
DSCR = NOI ÷ (Loan Amount × Mortgage Constant)
This makes the mortgage constant useful for quickly estimating maximum loan size under lender DSCR constraints.
Underwriting Applications
- Loan sizing analysis.
- Comparing lender quotes with different amortization schedules.
- Refinance scenario modeling.
- Stress testing interest rate increases.
Common Pitfalls
- Confusing mortgage constant with interest rate.
- Ignoring differences in amortization terms.
- Failing to account for balloon payments.
- Not distinguishing between interest-only and amortizing structures.
Investor Checklist
- Confirm amortization period.
- Determine if the loan has an interest-only period.
- Compare mortgage constant to going-in cap rate.
- Model refinance risk at maturity.