The biggest financial advantage in commercial real estate is leverage — using mortgage loans to control large assets while keeping your own capital free.
That said, every loan is structured differently and it’s important to understand how the repayment arrangement works.
Among these details, one of the most technical aspects is how interest is calculated.
After all, your lender’s calculation method can directly affect the total amount of interest paid throughout the loan term — and by extension, your property’s cash flow and returns.
How to Calculate Interest on Commercial Real Estate Loans
CRE lenders typically use one of three interest-accrual methods: 30/360, Actual/365, and Actual/360.
Because each method counts days differently, the total interest due each month — and over the life of the loan — changes noticeably.
Example loan scenario
Do you want to see how these three methods play out in practice?
Imagine buying a commercial property priced at $1,000,000 (for the sake of simplicity). Let’s say that your lender approves the following loan terms:
- Loan amount of $750,000 (75% LTV)
- A term of 25 years
- $250,000 down payment
- 00% interest rate
- 25-year amortization period
- 12 monthly payments per year
Now let’s calculate the interest portion of each payment by using the three common accrual methods. Let’s first look at how the 30/360 method works.
How the 30/360 method applies to this loan
Under the 30/360 interest-accrual system, each month is treated as having 30 days and the year as having 360 days.
Using the information in the example above, your monthly mortgage payment will be $5,845, of which $4,166 goes toward interest and $1,679 toward principal.
Here’s how to calculate the interest portion of the first payment:
Find the daily rate.
Divide the annual rate (5%) by 360 days:
0.05 ÷ 360 = 0.00013889 (or 0.013889% per day)
Find the monthly accrual rate.
Multiply the daily rate by 30 days:
0.013889% × 30 = 0.41667% per month
Calculate the interest for the first month.
Multiply the monthly rate by the loan balance of $1,000,000:
0.41667% × $1,000,000 = $4,166.70
With this calculation, $4,166 of the first monthly payment goes toward interest. Subtracting this from the total payment gives you the principal portion:
$5,845 − $4,166 = $1,679
The key takeaway is that under the 30/360 method, the first month’s interest is $4,166, which will differ slightly under other accrual methods.
How the Actual/365 method applies to this loan
With the Actual/365 method, interest is based on the actual number of days in each month while assuming 365 days in a year. The process is similar to the 30/360 example and follows three steps:
Find the daily rate.
Divide the annual rate (5%) by 365 days:
0.05 ÷ 365 = 0.00013699 (or 0.013699% per day) — slightly less than the 30/360 daily rate.
Find the monthly accrual rate.
Multiply the daily rate by the actual number of days in the month.
If the first payment is due in January (31 days):
0.013699% × 31 = 0.424669% per month
Calculate the monthly interest.
Multiply the monthly rate by the outstanding balance of $1,000,000:
0.424669% × $1,000,000 = $4,247
In this case, the first month’s interest is $4,247, about $81 higher than under the 30/360 method ($4,166).
While the difference seems small, it compounds over time and can meaningfully affect total interest paid over the loan’s life.
How the Actual/360 method applies to this loan
With Actual/360, you use the actual days in the month and assume 360 days in a year.
Daily rate
0.05 ÷ 360 = 0.00013889 (0.013889%/day)
Monthly accrual rate (January, 31 days)
0.013889% × 31 = 0.430556%
Monthly interest
0.430556% × $1,000,000 = $4,305.56 → $4,305
So, January interest under Actual/360 is $4,305 — the highest of the three methods.
(For reference: 30/360 ≈ $4,166–$4,167; Actual/365 (31 days) ≈ $4,247.)
Comparing all three interest calculation methods
Now, let’s see how the results stack up for the same loan scenario:
- 30/360: $4,166
- Actual/365: $4,247
- Actual/360: $4,305
Even though the monthly difference appears small at about $80 to $90, it becomes more meaningful over your loan’s 25-year term.
Your total interest paid would look like this based on a full amortization schedule:
- $440,753 with 30/360
- $440,964 with Actual/365
- $449,017 with Actual/360
That’s nearly a $9,000 difference between the lowest and highest totals — money that ultimately goes to your lender instead of going to you.
Moreover, these variations can affect key financial metrics, such as your debt service coverage ratio (DSCR) and overall return projections.
Why understanding interest accrual methods matters
Essentially, it helps to know which interest accrual method your lender uses so you can adjust your financial models accordingly.
While you usually can’t change the calculation method, understanding how it affects your total interest payments and projected cash flow can help you produce more reliable underwriting projections and plan more effectively over time
Regional and regulatory practices
Although the math behind interest accrual appears straightforward, it’s important to note that the methods used vary across global lending markets.
The Actual/360 method is still frequently applied in commercial real estate financing in the United States.
Banks and institutional lenders often prefer this approach because it slightly increases their effective yield without changing your stated interest rate.
It’s also a long-standing convention in US banking, particularly when you’re taking out floating-rate or short-term commercial loans.
Meanwhile, European and Asian lenders tend to use Actual/365 or Actual/Actual methods.
These are viewed as more precise and borrower-friendly since they align your interest accrual with the actual number of days in a year.
The 30/360 convention still appears in certain bond markets and older loan portfolios in these parts of the world, but it’s becoming less common for newly originated commercial loans outside the US.
Most jurisdictions don’t really specify which accrual basis must be used to calculate your interest, but consumer-protection and disclosure rules influence these practices.
- The Truth in Lending Act in the US requires transparent APR disclosures, which is why lenders must clearly state their accrual basis to you in the loan documents.
- Practices vary across Asia, as they depend on local banking rules or the standards of a multinational lender’s home country.
- The Capital Requirements Directive (CRD IV) and EBA guidelines promote transparency and consistency, indirectly encouraging the use of Actual/365 in the European Union.
As you can see, interest accrual practices differ widely depending on where you borrow and who you borrow from.
So if you plan to buy property outside the US, it pays to take the time to learn how local lenders in the countries you’re investing in calculate interest so you can compare loans accurately and avoid errors in your cash flow and return projections.
What you should do next
As a commercial real estate investor, it’s important to understand how interest accrues as part of due diligence. Here are a few practical steps to take before closing a deal:
- Review your loan agreement carefully.
There should be a section called ‘Interest Calculation Basis’ or ‘Interest Period’ in your loan agreement. From there, you can confirm whether your lender uses 30/360, Actual/360, or Actual/365, and see how that aligns with your financial model. - Test all three scenarios in your underwriting model.
Your lender may specify only one method, but it’s much more prudent to run projections using each if you want to understand how small changes in interest accrual can affect annual debt service and DSCR, as well as long-term returns. - Discuss your findings with your lenders and partners.
Are you working as part of a joint venture or syndicated investment? Make 100% sure that everyone understands how the chosen accrual method affects the project’s performance metrics and cash flow expectations to prevent confusion once distributions begin.
As you can see, paying attention to accrual methods makes you well-prepared to forecast returns accurately and maintain transparent lender relationships — and more importantly, it allows you to protect your investment’s performance over time.
Key takeaways
Most commercial real estate investments rely on debt financing, and the loan terms directly influence the cash available for investor distributions. That’s why you should understand every aspect of the loan structure, especially how interest accrues.
Lenders typically use one of three main accrual methods: 30/360, Actual/360, and Actual/365.
The difference between them lies in how many days of interest are counted each month, which ultimately affects how much interest you pay over time.
Even small differences in calculation can lead to noticeable changes in your total loan costs and cash flow performance.
When you understand your lender’s method, you can be sure that your financial models align with your expectations and the return projections throughout the life of the loan.
Talk to the experts about CRE loans
At Private Capital Investors, we specialize in short-term loans secured by commercial real estate across the US As a direct private lender, we take a tailored approach to help you secure the right funding solutions.
At the same time, we’re your trusted commercial lending partner who can help you navigate complex loan terms with confidence, whether you’re expanding your portfolio or refinancing an existing asset.
Call 972-865-6206 or email info@privatecapitalinvestors.com to request a loan consultation.
