Cash & working capital
Mortgage Constant
Formula reviewed by Tahir Asif, CMA
The annual debt service on a loan divided by the loan amount, used to compare the cost of borrowing with a property’s cap rate.
The mortgage constant is the yearly payment, principal and interest, as a percentage of the original loan. A $300,000 loan at 7% over 30 years has a payment of about $23,951 a year, a constant of 7.98%. It is higher than the interest rate because it includes principal.
If a property’s cap rate is below the mortgage constant, borrowing lowers the cash-on-cash return, which is called negative leverage. If the cap rate is above it, borrowing raises the return.
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