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Housing Unpacked
Glossary

Debt service

The total of principal and interest payments a borrower must make on a loan over a period, usually expressed per year; the largest fixed claim on a building's income.

Debt service is what a loan costs to carry: the interest owed plus any repayment of principal, added up over a year. For a fully amortizing mortgage it is the monthly payment multiplied by twelve. It is paid out of net operating income before the owner sees anything, which is why lenders describe it as the first claim on the building.

Annual debt service
Annual debt service = monthly payment × 12
or = loan amount × mortgage constant

Assume a $15,600,000 loan at 6.5% interest, amortized over 30 years. Annual debt service is $1,183,231, or about $98,600 per month. In the first month, $84,500 is interest and $14,103 is principal.

Debt service depends on three things: the loan amount, the interest rate, and the amortization period. Raising the loan, raising the rate, or shortening the payoff period all increase it. The mortgage constant packages the last two into a single percentage that can be multiplied by the loan balance.

For rent, debt service is the link between construction cost and the monthly bill. Every dollar of cost that is financed with debt has to be repaid with interest out of rent. Our rule of thumb, that each $10,000 of cost per unit requires about $68 per month of rent under our default assumptions, is mostly debt service, with the remainder being the return on the equity that debt did not cover.

Where this comes up

Analysis that uses debt service in the arithmetic.

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