What it means
Two lenders quote different rates and different terms on the same building. Which loan actually costs more each year?
The loan constant answers in one figure: the annual payments as a share of the amount borrowed, whatever the underlying mix of rate and schedule. The number bundles two things, since the interest rate prices the money and the amortisation schedule decides how fast principal leaves.
A 25-year amortising loan at 6% carries a constant near 7.7%, because each year you pay interest plus a slice of principal back. Shorter amortisation means a higher constant at the same rate, so a 20-year schedule repays principal faster and annual debt service is larger even though total interest is lower.
Real estate runs on the metric. Investors compare the loan constant against a property's capitalisation rate: when the constant sits below the cap rate, debt amplifies returns, and when it climbs above, leverage works against the buyer.
That single comparison, cap rate versus constant, screens deals in seconds. The constant is also the bridge to coverage.
Debt service coverage ratios, the lender's core test, divide income by payments, and payments are just the constant times principal, so every DSCR conversation is a loan constant conversation in disguise. Borrowers weigh yearly cash strain against lifetime cost when choosing between schedules.
Interest-only periods bend the rule. During an interest-only phase the constant equals the rate itself, which is why such structures flatter early cash flow, and why the jump when amortisation begins, called constant shock in the trade, needs planning.
The metric's honesty is its age. Loan constants predate spreadsheets, when lenders quoted from printed tables, and they survive because one percentage that folds in rate and term still beats a paragraph of terms for quick comparison.
The loan constant is annual debt service per dollar borrowed, rate and amortisation fused, to be compared against yield to see whether leverage helps and against income to see whether the loan can be carried at all.
In practice
Real-world examples.
Example
A $1 million loan at 6% amortising over 25 years costs about $77,300 a year, a 7.73% constant. The buyer compares that against the building's 8.5% cap rate and proceeds, because the constant sits below the yield.
Example
The same loan over 20 years jumps to an 8.6% constant, or about $86,000 a year. The buyer keeps the 25-year term, valuing yearly breathing room over total interest saved.
Example
An interest-only bridge shows a 7% constant equal to its rate. The borrower models the amortising takeout at 9.2% before committing, refusing to be surprised at conversion.
Formula
Calculation
Loan constant = annual debt service / original principal. For amortising loans with monthly payments: periodic payment = principal x i / (1 - (1 + i)^-n), with i the monthly rate and n the total number of payments; the annual debt service is twelve payments.
Worked example: a $1,000,000 loan at 6% over 25 years has i = 6% / 12 = 0.5% and n = 25 x 12 = 300. The factor (1.005)^300 is about 4.465, so (1.005)^-300 is about 0.224 and 1 - 0.224 = 0.776. The monthly payment is $1,000,000 x 0.005 / 0.776 = about $6,443, and annual debt service is 12 x $6,443 = about $77,300. The loan constant is $77,300 / $1,000,000 = 7.73%.Case study
Seen in the real world.
Fictional example: Osei Properties, a fictional investor, weighs two quotes on a $2 million warehouse: Bank A at 6.25% over 25 years, Bank B at 5.9% over 20. The constants tell the real story, roughly 7.9% versus 8.5%: B's lower rate is more than offset by its faster schedule, costing about $12,000 more each year. Osei takes A, then watches rates fall and refinances at a 7.1% constant, the cap-rate-versus-constant spread widening to 1.4 points. The constant table, a printed sheet in a drawer, did in one glance what three term sheets obscured.
Osei's lender also asks for a debt service coverage ratio, so the investor checks that the warehouse income covers the payments with room to spare. The same constant gives the annual payment in one multiplication, and the check takes only a few minutes. The company and figures are invented and illustrative only.
Watch out
Common mistakes.
- Comparing rates instead of constants. A lower rate on a shorter schedule can cost more per year; only the constant folds rate and amortization into a comparable figure.
- Ignoring the cap rate comparison. When the constant exceeds the property's yield, leverage destroys return rather than amplifying it, a sign the deal or the debt needs restructuring.
- Forgetting interest-only conversion. An IO phase flatters the constant early; the amortising number at conversion is the one the business must actually carry.
Questions
People also ask.
What is a loan constant?
Annual debt service as a percentage of original principal. It combines interest rate and amortization schedule into one figure for comparing the yearly cost of different loans.
Why do real estate investors use it?
To test leverage in one step: when the loan constant is below the property's capitalization rate, debt amplifies returns; above it, leverage works against the buyer.
How is it calculated?
Divide annual payments by the amount borrowed. For an amortising loan it equals i over (1 minus (1+i) to the minus n), annualized, the same factor lenders' old constant tables printed.
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