Actual 360

Definition of Actual/360

In commercial mortgages, Actual/360 is a day count convention used to calculate the amount of accrued interest on a loan. Under this method, the interest for any given period is determined by using the actual number of days in the month (28, 29, 30, or 31) divided by a fixed year of 360 days.

Detailed Description of Actual/360

The Actual/360 method is the most prevalent interest calculation standard in the commercial real estate finance industry, particularly for CMBS (Commercial Mortgage-Backed Securities), bridge loans, and construction financing. While it may seem like a minor technicality, it has a direct impact on the total interest paid by a borrower over the life of the loan.

The primary mechanics and implications of this method include:

• Effective Interest Rate: Because the interest is calculated based on 365 or 366 days in a year but divided by a denominator of only 360, the borrower effectively pays more interest than the stated "coupon" rate suggests. The effective rate is typically about 1.38% higher than the nominal rate (for example, a 5.00% stated rate behaves like a 5.069% rate).
• Monthly Fluctuations: Unlike the 30/360 method, where every month is treated as having 30 days, the Actual/360 method results in different interest charges each month. A borrower will pay more interest in a 31-day month (like July) than they will in a 28-day month (February).
• The "Extra" Days: Over the course of a calendar year, the borrower pays for 5 or 6 "extra" days of interest. Lenders prefer this method because it increases the yield on the loan without necessitating a higher quoted interest rate.
• Calculation Formula: The formula for calculating interest for a specific period is: (Principal Balance × Annual Interest Rate × Actual Days in Period) / 360.

Comparison to Other Methods

To understand the significance of Actual/360, it is often compared to the 30/360 convention. In a 30/360 model, the annual interest is exactly what the stated rate suggests because it assumes twelve 30-day months. In contrast, Actual/360 results in higher debt service payments for the borrower and higher revenue for the lender.

Borrowers and developers must account for this difference when modeling their Debt Service Coverage Ratio (DSCR) and overall cash flow, as the slightly higher payments can impact the net profitability of a commercial property over a long-term hold period.