Mortgage Constant and Debt Yield Explained
Two lender numbers that explain more about a deal than the interest rate does — plus one identity that ties them to DSCR.
8.34 ÷ 7.78
Debt yield over mortgage constant — and that quotient is your DSCR.
The mortgage constant
Mortgage constant = Annual debt service ÷ Loan amount
Also called the loan constant. Includes principal, which is why it exceeds the interest rate.
On the $240,000 example — $180,000 borrowed at 6.75% over thirty years, $14,009 a year — the constant is 7.78%. That is a full point above the interest rate, because every payment also returns principal.
This is the number to compare against a cap rate, not the interest rate. Comparing a 6.25% cap rate to a 6.75% rate suggests you are slightly underwater; comparing it to the 7.78% constant tells you by how much, in the units that actually leave your account.
| Rate | Constant, 30-year | Constant, 25-year | Constant, 40-year |
|---|---|---|---|
| 5.00% | 6.44% | 7.02% | 5.79% |
| 6.00% | 7.19% | 7.73% | 6.60% |
| 6.75% | 7.78% | 8.29% | 7.24% |
| 7.50% | 8.39% | 8.87% | 7.90% |
| 8.00% | 8.81% | 9.26% | 8.34% |
This is the leverage test, in one comparison
Debt yield
Debt yield = NOI ÷ Loan amount
No rate, no amortisation, no term. Just what the property earns per dollar lent.
The $240,000 example
- NOI
- $15,004
- Loan amount
- $180,000
Debt yield = 8.34%
Lenders like this number for one reason: it cannot be flattered. DSCR can be improved by stretching amortisation to forty years or by an interest-only period — neither of which makes the property earn a cent more. Debt yield ignores the loan structure entirely and asks only what the lender would earn if they had to take the keys tomorrow.
| Debt yield | Lender reading |
|---|---|
| Below 7% | Thin. Many lenders decline, or require a larger down payment. |
| 8% – 10% | The common comfort band for stabilised residential and small commercial. |
| Above 10% | Strong. Usually a cash-flow market or a low loan-to-value. |
You can also run it backwards to size a loan. At a 9% debt-yield floor, this property supports $15,004 ÷ 0.09 = $166,711 — less than the $180,000 assumed. At an 8% floor it supports $187,550. Which constraint binds, debt yield or DSCR, depends on where rates are.
The identity that ties them together
DSCR = Debt yield ÷ Mortgage constant
Because DSCR = NOI ÷ debt service, and both of the other terms share the loan amount as denominator.
Check it: 8.34% ÷ 7.78% = 1.07 — the same DSCR computed the ordinary way. The identity is worth internalising because it separates the two things that produce coverage. Debt yield is a fact about the property and the loan size. The mortgage constant is a fact about the loan terms. Coverage is their ratio, and knowing which one is weak tells you which lever to pull.
| If coverage is thin because… | The fix is… |
|---|---|
| Debt yield is low (property earns little per dollar lent) | Borrow less, or raise NOI. No loan structure fixes it. |
| The constant is high (expensive or fast-amortising debt) | A lower rate, longer amortisation, or a rate buydown. |
| Both | The price is wrong. Negotiate or walk. |
Beware coverage bought with amortisation
The free calculator gives you NOI and annual debt service directly; both figures above are one division away from there.
Frequently asked questions
What is the mortgage constant?
Annual debt service divided by the original loan amount, expressed as a percentage. It is always higher than the interest rate because it includes principal repayment, and it is the correct figure to compare against a property's cap rate when judging whether leverage helps or hurts.
What is debt yield in commercial real estate?
Net operating income divided by the loan amount. It measures what the property earns per dollar lent, independent of interest rate, amortisation and term, which is why lenders use it as a floor that cannot be improved by restructuring the loan.
What is a good debt yield?
Most lenders look for 8 to 10% on stabilised residential and small commercial property. Below about 7% many will decline or require more equity, since the figure represents the return they would earn if they took the asset back.
How is debt yield different from DSCR?
DSCR compares NOI to the actual debt payment, so it changes with rate, term and amortisation. Debt yield compares NOI to the loan balance and ignores all of those. Dividing debt yield by the mortgage constant gives DSCR exactly, which is a useful way to see whether thin coverage comes from the property or from the loan terms.