Mortgage Loan Payable

Mortgage loan payable is the liability account in which a business or other borrower records the principal it still owes on a loan secured by real estate, such as an office building, warehouse, factory or rental property. The lender holds a lien on the property, which allows it to take and sell the property through foreclosure if the borrower fails to pay. The loan arrangement itself, from the borrower's and lender's point of view, is described in the entry on the mortgage loan; this entry covers how the obligation appears in the borrower's accounts.

Because most commercial mortgages run for many years, mortgage loan payable is usually a long-term liability, with the principal due within the next twelve months shown separately as a current liability. Interest is not part of the balance; it is recognized as an expense over time.

When the loan is received, the borrower debits cash (or the property, if the loan proceeds go straight to the seller) and credits mortgage loan payable for the principal borrowed. Loan fees and closing costs paid to the lender are, under US GAAP, deducted from the carrying amount of the loan and amortized as additional interest expense, so the liability is shown net of these costs.

Most mortgages are repaid in level installments that combine interest and principal. The payment is calculated as:

Here $P$ is the principal borrowed, $r$ is the interest rate per period and $n$ is the number of payments. Each payment is split using an amortization schedule: interest is the opening balance times the periodic rate, and the remainder reduces principal.

A company buys a building and borrows $500,000 under a 20-year fixed-rate mortgage at 6 percent a year, with monthly payments. The monthly rate is 0.5 percent and there are 240 payments, so the payment is about $3,582.16. In the first month, interest is $500,000 times 0.005, which is $2,500.00, and the principal reduction is $1,082.16. The journal entry debits interest expense $2,500.00 and mortgage loan payable $1,082.16, and credits cash $3,582.16. The balance falls to $498,917.84.

At the end of the first year, about $13,350 of principal has been repaid and the balance is roughly $486,650. The principal scheduled for repayment in year two, about $14,170, is reclassified as the current portion of long-term debt, and the rest remains a long-term liability. If the month-end falls between payment dates, the business also accrues interest through interest payable.

On the balance sheet, the property appears as an asset at cost less depreciation, and the mortgage appears separately as a liability; the two are not netted against each other. The notes disclose the interest rate, maturity date, monthly payment, the property pledged as collateral, any covenants, and the principal due in each of the next five years. In the statement of cash flows, the loan proceeds and principal repayments are financing activities, while interest paid is an operating cash outflow under US GAAP.

• Recording the whole monthly payment as expense, which overstates expense and leaves the liability too high.
• Failing to reclassify the next year's principal to current liabilities, which flatters the current ratio.
• Ignoring a balloon payment due at maturity, which may need refinancing and should be disclosed.
• Breaching a covenant such as a minimum debt service coverage ratio, which can make the entire loan callable and require it to be shown as current.