Interest-only and amortising versions of the same $30 million loan, month by month, and what the day count does to DSCR and the balloon.
Actual/360 charges interest on the actual number of days in each period at the annual rate divided by 360, so a full year of 365 days costs 365/360 of the stated rate. A 6.50 per cent loan therefore costs 6.59 per cent, 1.39 per cent more interest: $27,083 a year on an illustrative $30,000,000 interest-only loan. On an amortising loan whose payment is set on 30/360, the extra interest comes out of principal instead, and the ten-year balloon is $376,304 larger.
Worked in full in The Real Estate Debt Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most US commercial mortgages and almost all floating-rate loans accrue on actual/360. The convention is written in one line of the note, rarely discussed in the term sheet, and easy to miss in a model that computes interest as rate over twelve. It is worth nine basis points a year at a 6.50 per cent coupon, every year of the term.
| Term | Value |
|---|---|
| Loan amount | $30,000,000 |
| Note rate | 6.50% |
| Amortisation (amortising case) | 30 years, payment set on 30/360 |
| Term | 10 years, first payment January 2027 |
| NOI, for the coverage test | $2,600,000 |
Interest = balance × rate × actual days / 360
In Excel, with the period start in A2 and end in B2: =30000000*6.5%*(B2-A2)/360. Under 30/360 the same month is =30000000*6.5%/12 whatever its length.
| Month length | Actual/360 | 30/360 |
|---|---|---|
| 28 days | 151,667 | 162,500 |
| 30 days | 162,500 | 162,500 |
| 31 days | 167,917 | 162,500 |
February is cheaper and the seven 31-day months are dearer. Over a year the dearer months win, because 365 days are being charged at a rate built for 360.
| Convention | Annual interest | Effective rate |
|---|---|---|
| 30/360 | 1,950,000 | 6.50% |
| Actual/365 | 1,950,000 | 6.50% |
| Actual/360, 365-day year | 1,977,083 | 6.59% |
| Actual/360, leap year | 1,982,500 | 6.61% |
Effective rate = note rate × 365 / 360 = 6.50% × 1.0139 = 6.5903%
Extra interest = 30,000,000 × 6.50% × 5 / 360 = 27,083 a year, 32,500 in a leap year.
On an interest-only loan, debt service rises with it. At $2,600,000 of NOI, coverage falls from 1.333x on a 30/360 basis to 1.315x on actual/360. A model that tests a 1.30x covenant on rate over twelve shows more headroom than the loan agreement will.
On a fully amortising loan the monthly payment is usually set as if interest were 30/360: =PMT(6.5%/12, 360, -30000000) = $189,620, $2,275,445 a year. The payment does not change; interest is then charged on actual days, and principal is whatever is left. Running both versions through 120 real calendar months from January 2027, leap years included:
| Accrual | Interest paid | Principal repaid | Balloon at year 10 | Balloon % of loan |
|---|---|---|---|---|
| 30/360 | 18,187,287 | 4,567,162 | 25,432,838 | 84.8% |
| Actual/360 | 18,563,591 | 4,190,858 | 25,809,142 | 86.0% |
| Difference | 376,304 | −376,304 | 376,304 |
The borrower pays exactly the same cash every month, so DSCR is unchanged, but 8.2 per cent less principal is repaid over the term and the refinancing has to find $376,304 more. Taking the internal rate of the borrower's cash flows, the cost is 6.59 per cent a year against 6.50 under 30/360. For the balloon itself, see how to calculate a balloon payment.
| Note rate | Effective rate | Extra a year | Extra (bp) |
|---|---|---|---|
| 4.00% | 4.056% | 16,667 | 5.6 |
| 6.50% | 6.590% | 27,083 | 9.0 |
| 9.00% | 9.125% | 37,500 | 12.5 |
The premium is always 5/360 of the rate, so it scales with the coupon: on a floating-rate bridge loan at 9 per cent it is worth 12.5 basis points a year.
Actual/360 multiplies the stated rate by 365/360: 6.50 per cent becomes 6.59, $27,083 a year on $30,000,000, or $376,304 of extra balloon on the amortising version. Read the day count before comparing quotes, and model interest on actual days. The Real Estate Debt Investor works through how a lender prices and structures a loan, and the free workbooks for the book include a sizing and exit-test model for your own loans; the payment side is in how to calculate the mortgage constant.
Interest for each period is the balance times the annual rate times the actual number of days in the period divided by 360. A 31-day month on $30,000,000 at 6.50 per cent costs $167,917 against $162,500 under 30/360. Over a 365-day year the borrower pays 365/360 of the stated rate, 6.59 per cent instead of 6.50.
Over a full year, nothing: 30/360 counts every month as 30 days of a 360-day year, actual/365 counts actual days of a 365-day year, and both charge the stated rate, $1,950,000 on $30,000,000 at 6.50 per cent. Only actual/360 charges more, because it divides real days by a short year: $1,977,083 in a normal year, $1,982,500 in a leap year.
On an interest-only loan, yes, because debt service rises by 1.39 per cent: on $2,600,000 of NOI the coverage falls from 1.333x to 1.315x. On an amortising loan with a fixed payment set on 30/360, debt service and DSCR are unchanged; the extra interest is taken from principal instead, and shows up as a larger balloon at maturity.
This article is one calculation from The Real Estate Debt Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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