Loan Constant Calculator
The loan constant, also called the mortgage constant, expresses annual debt service as a percentage of the original loan amount. It is a quick way to compare the true cost of different financing and to test for positive leverage: when a property's cap rate exceeds the loan constant, debt boosts the return on equity. Enter the loan amount, annual interest rate, and amortization term in years. The calculator returns the monthly payment, annual debt service, and the loan constant as a percentage.
Loan constant formula
i = annual rate / 12 / 100, n = term * 12
Monthly payment = loan * i / (1 - (1 + i)^-n)
If i = 0: monthly = loan / n
Annual debt service = monthly payment * 12
Loan constant (%) = annual debt service / loan * 100
The loan amount, interest rate, and term must be positive. The loan constant assumes a fully amortizing loan with equal monthly payments and reflects both principal and interest.
Loan constant context
- The loan constant is always higher than the nominal interest rate for an amortizing loan.
- Shorter amortization terms raise the loan constant because principal is repaid faster.
- Positive leverage occurs when the property cap rate exceeds the loan constant.
- Lenders and investors use the loan constant to size debt and gauge debt coverage.
- For an interest-only loan the loan constant equals the annual interest rate.
Loan constant: frequently asked questions
What is the loan constant?
The loan constant, or mortgage constant (Ky), is the ratio of annual debt service to the original loan amount, expressed as a percentage. It tells you what fraction of the loan principal is paid out each year in combined principal and interest payments on a fully amortizing loan.
How is the loan constant calculated?
First compute the monthly payment using the standard amortization formula. Multiply by 12 to get annual debt service, then divide by the original loan amount. The result, expressed as a percentage, is the annual loan constant.
Why do real estate investors use the loan constant?
The loan constant lets investors quickly compare debt cost across loans and check whether a property's cap rate exceeds it. When the cap rate is higher than the loan constant, the loan generates positive leverage, boosting return on equity.
What is the difference between the loan constant and the interest rate?
The interest rate covers only interest, while the loan constant covers both interest and principal repayment. The loan constant is therefore always higher than the interest rate for an amortizing loan, and the gap widens with shorter terms.
What happens with an interest-only loan?
For an interest-only loan there is no principal amortization, so annual debt service equals the interest rate times the balance and the loan constant equals the annual interest rate. This calculator models a fully amortizing loan over the term you enter.
Official sources
- Consumer Financial Protection Bureau: Loan Options and Amortization.
- U.S. Securities and Exchange Commission: Investor.gov Financial Tools.
Reviewed by the CalculatorHub team, edited by James Graham, 16 June 2026. See our methodology.