A commercial mortgage is not a home mortgage with a larger number. It is a loan against an income-producing property, underwritten on the income the property produces, repaid on a schedule that outlives the loan itself, and refinanced or repaid in full when the term ends. The payment looks gentle because it is calculated as if the loan had 25 years to run. The debt is not gentle, because the loan itself typically runs for 5, 10, or 15 years, and everything still owed at the end falls due at once, as a balloon payment. This guide explains how the payment is worked out, how lenders judge whether the property can carry it, what moves the rate, and what happens at the balloon, so the calculator result reads as a plan rather than a surprise. No rate quoted here is a live rate: any rate figure in an example is labelled illustrative, and real rates are quoted by lenders for a specific property, borrower, and date.

The two clocks: amortization and term

Every commercial mortgage carries two time periods, and the most common misunderstanding in commercial borrowing is to treat them as one. The amortization period is the schedule the payment is calculated from: the loan is priced as if it were repaid in equal monthly payments over, often, 25 years. The term is the life of the loan itself: the period after which the lender requires the remaining balance to be repaid or refinanced, often 5, 10, or 15 years. The payment is small because the amortization is long. The risk is large because the term is short. The hub calculator shows both clocks side by side for exactly this reason: the monthly payment, and the balloon waiting at the end of the term.

The relationship people misread is the one between the two clocks and the balance. Because the payment is sized for 25 years, each payment repays relatively little principal in the early years, and most of it is interest. After 10 years of payments on a 25-year schedule, well over half of the original loan typically remains outstanding, and that remainder is the balloon. A borrower who budgets only for the payment, and never for the balloon, has budgeted for the gentle clock and ignored the real deadline. The balloon is not a penalty and not a surprise clause. It is the structure of the loan, known from the first payment, and the whole borrowing plan, including the exit, should be decided before the loan is signed.

Residential mortgages in many countries work differently, which is why the comparison misleads. A typical home mortgage amortizes fully over its term: the last payment clears the balance, and there is no balloon. A commercial mortgage amortizes partially and balloons: the last payment of the term clears only that month, and the balance remains. The commercial structure exists because lenders want to reprice and re-underwrite the loan periodically, and because property owners expect to refinance, sell, or recapitalise on a cycle shorter than 25 years. It suits borrowers who plan for the cycle. It punishes borrowers who assume the payment schedule is the loan.

How the monthly payment is worked out

The monthly payment follows the standard amortizing loan formula, using the amortization period, not the term. With a monthly rate r, meaning the annual rate divided by 12, and n monthly payments in the amortization period, the payment is the loan amount multiplied by r, divided by 1 minus 1 plus r raised to the power of negative n. The formula is the same one used for home mortgages and car loans. What differs is the inputs: the loan amount is larger, the rate is set for the deal, and n is usually 300, for 25 years, while the borrower will make far fewer payments than that before the term ends.

Work an illustrative example, with every assumption stated. A loan of 1,000,000 dollars, at an illustrative fixed rate of 6.5 percent a year, amortized over 25 years, gives a monthly rate of 0.5417 percent and 300 scheduled payments. The payment is 6,752.07 dollars a month. The rate is illustrative only, chosen to make the arithmetic visible, not quoted from any lender, and a different rate changes the payment directly: a higher rate raises it, a lower rate lowers it, and the sensitivity is large because the balance is large. The hub calculator runs the same formula on the figures you enter, and its default case shows a payment of 7,067.79 dollars a month on its own default figures, with annual debt service of 84,813.50 dollars. Use the calculator for your figures, and use this example only to check that you understand the mechanics.

Three features of the payment deserve attention. First, it is fixed only if the rate is fixed for the term: many commercial loans carry a fixed rate for the term, and some carry a floating rate, in which case the payment moves with the benchmark rate and the balloon moves with it. Second, the payment includes principal and interest only: taxes, insurance, and reserves are usually paid separately, often into escrow, and they are part of the real monthly cost even though they are not part of the loan payment. Third, the payment assumes every payment is made on time and in full: missed or partial payments change the balance path, and the balloon, which is computed from the actual balance, moves with them.

The balloon: the balance at the end of the term

The balloon is the loan balance remaining when the term ends. It is worked out by growing the original loan at the monthly rate for the number of payments made, and subtracting the future value of the payments made, which is the standard remaining-balance calculation. On the illustrative loan above, 1,000,000 dollars at 6.5 percent amortized over 25 years, after 120 monthly payments of 6,752.07 dollars, the remaining balance is 775,113.59 dollars. Ten years of payments totalling 810,248.40 dollars have reduced the balance by only 224,886.41 dollars, because most of the early payments were interest. That is the arithmetic of long amortization, and it is why the balloon dominates commercial borrowing decisions: the borrower has paid more than three quarters of the original loan amount and still owes more than three quarters of it.

The balloon grows with a shorter term and shrinks with a longer one, and it shrinks faster when the amortization is shorter. A 15-year term on the same illustrative loan leaves a smaller balloon than a 10-year term, because 60 more payments have been made, and a 20-year amortization leaves a smaller balloon than a 25-year amortization at the same term, because each payment repays more principal. The trade is direct: a shorter amortization raises the monthly payment and lowers the balloon, while a longer amortization lowers the payment and raises the balloon. The hub calculator lets you move both dials and watch the balloon respond, and the right combination is the one whose payment the property income can carry and whose balloon the exit plan can handle, at the same time.

Interest-only periods change the picture further. During an interest-only period, the payment covers interest and repays no principal, so the balloon at the end of the term equals the full original loan amount, however long the period ran. Interest-only terms are sometimes offered at the start of a loan, or for the whole term of a bridge loan, and they maximise cash flow in the short run at the cost of maximising the balloon. The calculator page on interest-only loans, linked from the hub, models that extreme. Any loan with an interest-only element should be read with the balloon in the foreground: the payment is the smallest the structure allows, and the balloon is the largest it allows, and both facts are true at once.

DSCR: the test the lender applies

Lenders judge a commercial loan primarily by the property income, and the test is the debt-service coverage ratio, DSCR. DSCR is net operating income, NOI, divided by annual debt service, which is the total of principal and interest payments for the year. NOI is the property income after operating expenses and vacancies, but before debt service, income tax, and capital items: rent collected, minus the costs of running the property. A DSCR of 1.30 means the property produces 1.30 dollars of income for every 1 dollar of debt payment, leaving 30 cents of cushion. A DSCR below 1.00 means the property income does not cover the debt payment, and the borrower must fund the shortfall from elsewhere, which most lenders will not accept as a plan.

The hub default case makes the test concrete. NOI of 110,000 dollars a year, against annual debt service of 84,813.50 dollars, gives a DSCR of 1.30. That clears the 1.25 floor that many commercial lenders underwrite to, with about 30 cents of income standing behind every dollar of payment, which the hub guide describes as a narrower margin than the low payment suggests. The 1.25 figure is a common underwriting floor, not a universal rule: some lenders require more for some property types, some accept less with additional security or guarantees, and the requirement is set deal by deal. What is universal is the direction: a higher DSCR is a stronger deal, and a DSCR that only just clears the floor leaves no room for a vacancy, a rent fall, or a rate rise on refinancing.

Two cautions keep the DSCR honest. First, the lender NOI and the borrower NOI often differ, because the lender applies its own vacancy allowance, its own expense assumptions, and its own treatment of one-off income, and the lender figure is usually the lower one. Underwrite to the lender figure, not the optimistic one, and ask what assumptions the lender used. Second, DSCR is a snapshot at the current rate and income, while the loan must survive the term and the refinancing: stress the ratio at a higher rate, at a lower occupancy, and at a lower rent, and require it to clear the floor in the stressed cases too, not only in the base case. A deal that passes only when everything goes right is not a strong deal. It is a bet.

Rates: what moves them, and how to compare quotes

Commercial mortgage rates are quoted deal by deal, and no single published rate describes the market, because the rate follows the property, the borrower, and the structure. The factors that move it are stable, and they are worth knowing in order. Property type matters: a multi-family building with many tenants and stable rents is usually priced more favourably than a single-tenant specialist property, because the income is diversified and the property is easier to re-let. Loan-to-value ratio matters: a smaller loan against a larger value is safer for the lender and usually cheaper. DSCR matters: a stronger coverage ratio supports a better rate. Term and amortization matter: a shorter term and a shorter amortization reduce the lender risk and can improve the rate, at the cost of a higher payment or a sooner balloon. Borrower strength matters: experience, other assets, guarantees, and credit history all feature, because the lender is underwriting a person and a plan, not only a building.

Because rates are deal-specific, the only honest comparison is between quotes for the same deal, on the same date, with the same structure, and the comparison must include fees, not only the rate. Origination fees, legal costs, valuation costs, and any prepayment or exit fees belong in the comparison, because a lower rate with high fees can cost more than a higher rate with low fees over a short term. Ask every lender for the same information: the rate and whether it is fixed or floating, the term, the amortization, the payment, the balloon, the fees, and the prepayment terms, and put the answers side by side in a table before deciding. A quote that will not state the balloon plainly is a quote to set aside.

One further distinction matters for rate comparisons: the quoted rate and the effective cost are not the same when fees are charged up front or when the rate floats. An annual percentage rate or effective rate that includes fees, where the lender provides one, is the better comparison figure, provided every quote uses the same basis. Where no such figure is provided, compare total cost over the term: total payments, plus fees, plus the balloon, minus the amount borrowed, on identical structures. That total is the price of the loan. The rate is only one input to it, and the cheapest rate is not always the cheapest loan.

Terms, amortization, and prepayment

Typical commercial terms run 5, 10, or 15 years, with amortization commonly 20 to 30 years and often 25. The term choice is a bet on the refinancing market at the end of the term, and it should be made with the exit in mind: a 5-year term gives the earliest chance to reprice and the earliest refinancing risk, while a 15-year term locks the rate and the structure for longer and usually costs more. The amortization choice is a bet on cash flow against the balloon: a longer amortization lowers the payment and raises the balloon, a shorter one does the reverse. Neither choice is right in general. The right combination is the one the property income can carry through a stress, and whose balloon the exit plan can repay or refinance, on the day the term ends, not only on the day the loan is signed.

Prepayment terms deserve the same attention as the rate, because commercial loans commonly restrict early repayment, through lockout periods, prepayment penalties, yield maintenance, or defeasance, each of which can make an early exit expensive. Yield maintenance compensates the lender for the interest it loses when a loan is repaid early, and it can be large when rates have fallen. Defeasance replaces the property as security with government securities, which is complex and costly. Read the prepayment clause before signing, price the likely exit scenarios, and do not assume a loan can be repaid early without cost because a home mortgage could be. The hub guide notes the balloon exits; the prepayment clause decides what the exits cost if they are taken early.

Refinancing at the end of the term is the most common exit, and it is a new underwriting, not a renewal: the property will be revalued, the income retested, and the rate repriced at the market of that date, and none of those outcomes is guaranteed by the original loan. A property that has fallen in value, or whose income has fallen, may support a smaller loan than the balloon, leaving an equity gap the borrower must fund. Planning for the balloon therefore means maintaining the property, keeping occupancy and income strong, and preserving the ability to fund a gap, whether from cash reserves, additional equity, or a sale. The balloon is ten years away on the day the loan is signed, and it is the most important date in the loan. Plan for it first.

The three exits at the balloon

When the term ends, there are three exits, and they should be decided in advance, not discovered at the deadline. The first is refinancing: a new loan repays the balloon, on new terms, at the market of the day. It is the usual exit, and it depends on the property value, the income, and the lending market all cooperating at the same date. The second is sale: the property is sold and the balloon is repaid from the proceeds. It depends on the property being saleable at a price above the balloon plus costs, which depends on the market and on the condition of the property. The third is repayment from cash or other resources: reserves, a capital injection, or the proceeds of another transaction. It is the most certain exit and the least common, because few borrowers hold the full balloon in cash.

Each exit has a failure mode, and the plan should cover all three. Refinancing fails if the property will not support the new loan. Sale fails if the market will not pay the price. Cash repayment fails if the cash is not there. A robust plan has a preferred exit and a fallback: refinance if the market allows, sell if it does not, and hold reserves that narrow any gap between the balloon and the proceeds of either. Review the plan annually, as the term shortens and the balloon approaches, and act early if the preferred exit weakens: the worst time to discover that refinancing will not cover the balloon is the month the term ends. The calculator shows the balloon from the first calculation. The exit plan should be written at the same time.

Frequently asked questions

What are commercial mortgage rates right now?

Commercial mortgage rates are quoted deal by deal and change constantly, so no single current rate can be stated honestly in a guide. The rate for a specific loan depends on the property type, the loan-to-value ratio, the debt-service coverage ratio, the term, and the borrower. Get quotes from several lenders for the same structure on the same date, including fees, and compare total cost over the term, not only the headline rate.

How long is a typical commercial loan?

Terms are commonly 5, 10, or 15 years, while the amortization period used to calculate the payment is commonly 20 to 30 years, often 25. The term ends with a balloon payment of the remaining balance. The combination of a long amortization and a short term is the defining structure of a commercial mortgage, and the exit at the end of the term should be planned before the loan is signed.

How do you calculate a commercial mortgage payment?

Use the amortizing loan formula with the amortization period, not the term: payment equals loan amount times monthly rate, divided by 1 minus 1 plus monthly rate raised to the negative number of monthly payments in the amortization. For example, 1,000,000 dollars at an illustrative 6.5 percent, amortized over 25 years, gives a payment of 6,752.07 dollars a month. The hub calculator runs the same formula on your figures.

What is a good DSCR for a commercial loan?

Many commercial lenders underwrite to a DSCR floor of 1.25, meaning net operating income 25 percent above annual debt service, but the requirement varies by lender and property type. A DSCR of 1.30, as in the hub default case, clears that floor with a modest cushion. Stress the ratio at higher rates and lower occupancy before relying on it, since the lender will underwrite to its own, usually more conservative, income figure.

What happens at the end of a commercial loan term?

The remaining balance, the balloon payment, falls due in full. The borrower must refinance with a new loan, sell the property and repay from the proceeds, or repay from cash or other resources. Refinancing is a new underwriting at the market of the day and is not guaranteed. The exit should be planned before signing and reviewed annually as the term shortens.

How much deposit is needed for a commercial mortgage?

There is no single required deposit percentage: the equity required depends on the loan-to-value ratio the lender will support, which varies with property type, income strength, and borrower strength. Lenders typically require a substantial equity contribution, larger than for a home mortgage, and the exact figure is set deal by deal. The deposit, the DSCR, and the rate should be negotiated as one package, not separately.