A property produces $1,000,000 of net operating income. Two lenders both require 1.25x debt service coverage. Both quote 6.0 percent.
Lender A writes interest only. Lender B amortizes over 30 years.
Both lenders will let annual debt service reach $800,000, because $1,000,000 divided by 1.25 is $800,000 and that arithmetic is not in dispute.
Lender A lends $13.3 million. Lender B lends $11.1 million.
Nineteen point nine percent. On the same building, at the same coverage, at the same rate. If Lender B had used a 25-year schedule instead, the gap would be 28.9 percent.
Nobody negotiated any of that. The coverage test was identical and it was never the thing doing the work.
Why the denominator does the sizing
Write the ratio out and it becomes obvious.
DSCR = Net operating income ÷ Annual debt service
Rearranged for what a lender is actually solving:
Maximum annual debt service = NOI ÷ required DSCR Maximum loan = Maximum annual debt service ÷ debt constant
The coverage threshold sets the first line. The debt constant sets the second, and the debt constant is annual debt service divided by loan amount: the all-in annual cost of a dollar of debt including principal repayment.
On an interest-only loan the constant equals the coupon exactly. On an amortizing loan it is higher, because you are paying the loan down as well as paying for it.
| Coupon | Interest only | 30-year am | 25-year am | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 5.50% | 5.500% | 6.813% | 7.369% | |||||||
| 6.00% | 6.000% | 7.195% | 7.732% | |||||||
| 6.50% | 6.500% | 7.585% | 8.102% |
At 6.0 percent, moving from interest only to a 30-year schedule adds roughly 120 basis points to the constant. Moving to 25 years adds roughly 173. Those are not rate changes. The rate never moved. That is the amortization schedule showing up in the only place it can, which is the loan amount.
Divide $800,000 by each of those constants and you have the three loan amounts in the opening. That is the whole mechanism.
Which is why interest only stopped being a structure and became the default
If the schedule is what sizes the loan, then the schedule is where the pressure lands. And it has.
Fifty-six percent of new-issue CMBS balance in 2026 is full-term interest only (CRED iQ, 12 June 2026). In large-loan conduit deals the concentration is higher still: CRED iQ's February read of individual transactions found full interest only running between 85 and 97 percent of loans by count, with the partial-IO loans carrying interest-only periods averaging 98 months (CRED iQ, 27 February 2026).
Read that as a sizing story rather than a structuring preference. When coverage thresholds hold and coupons are where they are, interest only is the only lever left that moves proceeds without moving credit. Borrowers reached for it because it was the one thing still available.
One caveat to state plainly: those figures describe the securitized market. They are not a whole-market statistic and should not be quoted as one.
What it costs, and who pays
Interest only does not create proceeds out of nothing. It defers the constant rather than removing it.
A loan that never amortizes arrives at maturity owing exactly what it started at. It has to be replaced in full, at whatever coupon exists that year, against whatever net operating income the property is producing by then. CRED iQ flags the concentration of that problem in 2030 and 2031.
That is not hypothetical risk. It is the mechanism behind the current credit cycle. CRE CLO distress moved from 19 percent in July to 28 percent in August, the sharpest one-month move of any deal type this year, and both of August's defaults were tied to 2026 balloon maturities (CRED iQ via Commercial Observer, 8 September 2026). Loans that paid on time and then could not be replaced.
So the honest framing of the 19.9 percent is: interest only buys you a fifth more loan today and hands the entire principal balance to a future refinancing market you cannot see. Whether that is a good trade depends on the business plan, not on the sizing.
The asset class detail almost nobody prices
There is a structural point here that catches borrowers moving between property types.
Multifamily and agency execution commonly run to 30-year amortization. Conventional commercial debt on retail, office, industrial, storage and medical is frequently capped at 25 (Select Commercial rate table, 11 September 2026).
An owner who financed an apartment building last year at 30 years and is now buying a retail strip at the same coupon and the same coverage will be offered roughly 7.5 percent less loan, and nothing about the rate or the credit box will explain it. The schedule did it.
How to actually compare two quotes
Three things, in this order.
1. Normalise to the constant, not the coupon. Take annual debt service, divide by loan amount. That single number contains the rate and the schedule together and it is the only figure on which two quotes are comparable. You can run debt service and coverage in four fields without an account.
2. Ask what happens after the interest-only period. A loan with three years of interest only inside a ten-year term amortizes over the remaining seven on a schedule that is usually shorter than it looks. That step-up is a real cash flow event and it is frequently invisible in the quoted coverage, which is often calculated on the interest-only payment.
3. Ask which coverage they tested. Coverage on the interest-only payment and coverage on the fully amortizing payment are different numbers on the same loan. A lender quoting 1.25x on an interest-only basis may be at 1.04x on an amortizing basis. That is not dishonest, it is a convention, but you need to know which one you are being shown before you compare it to anything.
If you want the deal sized correctly the first time, build the deal memo with net operating income, debt service and coverage already computed, then drop your lending preferences and let the lenders who size to those numbers come to you.
The short version
A coverage threshold is a credit decision. A loan amount is an arithmetic one, and the arithmetic runs through the amortization schedule.
Two lenders can hold identical discipline, quote identical rates, require identical coverage, and write loans a fifth apart. Nothing in that gap is negotiable after the fact, because it was never a negotiation. It was a term in the quote that nobody read out loud.
Ask for the constant. It is the only number that answers the question.
For how coverage sits alongside debt yield and loan-to-value in the full sizing picture, start with the DSCR guide.