Mortgage constant

The mortgage constant is the share of a loan that must be paid each year to cover interest and scheduled principal. It combines the interest rate and the amortization period into one number. Multiply the constant by the loan balance and you have annual debt service.

Mortgage constant = (monthly payment × 12) ÷ loan amount
6.5% interest, 30-year amortization → 7.585% per year
5.5% / 30 yr → 6.81%   7.5% / 30 yr → 8.39%
6.5% / 25 yr → 8.10%   6.5% / 40 yr → 7.03%

The constant is always higher than the interest rate for an amortizing loan, because it includes principal repayment. It rises when rates rise and when the amortization period shortens. An interest-only loan has a constant equal to its rate.

The constant is the cleanest way to see how interest rates reach rent. Under our defaults, the constant is 7.585%, so every $1,000,000 borrowed requires $75,850 a year from the building's income. Moving the rate from 6.5% to 7.5% lifts the constant to 8.39%, an added $8,050 per year per $1,000,000 borrowed, before any change in the building. Lenders also use it in reverse: divide the maximum debt service a building's income can support by the constant, and you have the maximum loan.