Annual debt service, and the coverage it needs.
Debt service is the total of the loan payments due in a year, principal and interest together. Enter the loan amount, rate and amortization to see annual debt service on an amortizing loan and on an interest-only loan, how year one splits between interest and principal, and, if you add net operating income, the debt service coverage ratio for each.
- Year 1 interest
- —
- Year 1 principal
- —
- Interest-only, annual
- —
- DSCR, amortizing
- —
- DSCR, interest-only
- —
What debt service is
Debt service is the cash a borrower must pay to the lender in a period, usually expressed per year. On an amortizing loan it is twelve monthly payments, each covering interest and some principal. On an interest-only loan it is interest alone: the loan amount times the rate.
It is the denominator in the debt service coverage ratio, which is why lenders compute it before almost anything else. Annual debt service per dollar borrowed is the debt constant.
A worked example
A $5,000,000 loan at 7 percent amortizing over 25 years has a monthly payment of $35,339, so annual debt service is $424,068. In year one, $347,577 of that is interest and $76,491 is principal. Interest-only, the same loan costs $350,000 a year.
With $530,000 of net operating income, coverage is 1.25x on the amortizing payment and 1.51x interest-only. The difference is why interest-only periods help a property clear a coverage test, and why lenders often test coverage on the amortizing payment anyway.
| Measure | Amortizing (25 years) | Interest-only |
|---|---|---|
| Monthly payment | $35,339 | $29,167 |
| Annual debt service | $424,068 | $350,000 |
| Year 1 principal repaid | $76,491 | $0 |
| DSCR | 1.25x | 1.51x |
What a 1.25x coverage requirement means
A 1.25x requirement means NOI must be at least 125 percent of annual debt service, leaving a cushion if income falls. Run backwards, it caps the debt service a property can carry: $530,000 of NOI at 1.25x supports $424,000 of annual debt service, which at 7 percent over 25 years is a loan of about $5,000,000. The commercial real estate loan calculator runs that sizing against LTV and debt yield too.
Debt service in bank underwriting
Banks and credit unions often look past the property to global debt service: every loan payment the borrower and guarantors owe across all their properties and businesses, compared with all their income. The property-level figure here is the building block for that analysis, and the guarantor's personal financial statement supplies the rest.
Questions lenders ask
- How do you calculate debt service?
- For an amortizing loan, compute the monthly payment from the loan amount, rate and amortization period and multiply by 12. For an interest-only loan, multiply the loan amount by the annual rate. $5M at 7% over 25 years is $424,068 a year amortizing and $350,000 interest-only.
- What does a 1.25 debt service coverage ratio mean?
- Net operating income is 1.25 times annual debt service, so income could fall 20 percent before it no longer covers the payments. Lenders set their own minimums by property type and loan program, so check the term sheet.
- Does debt service include principal?
- Yes, on an amortizing loan debt service is principal and interest together. On an interest-only loan, or during an interest-only period, it is interest alone.
- How do I calculate my total debt service?
- Add the annual debt service of every loan the borrower owes. Lenders that underwrite global cash flow compare that total with the combined income of the borrower and guarantors.
- Are taxes and insurance part of debt service?
- No. Tax and insurance escrows may be collected with the monthly payment, but they are operating expenses, not debt service. Leave them out when computing DSCR.
See your deals in real time.
Send us one live deal. We will build the room on your own checklist.