What Does DSCR Mean In Commercial Finance?
DSCR stands for Debt Service Coverage Ratio.
It measures how comfortably income covers the repayments on a loan. Lenders use it constantly on commercial mortgages and investment property lending, because it answers the question they care most about: is there enough surplus income to keep paying this facility if things get tighter?
The calculation is straightforward: net operating income divided by total debt service over the same period.
DSCR Example
- Annual rental income after costs: £96,000
- Annual mortgage payments: £80,000
- DSCR = 1.20
A DSCR of 1.0 means income exactly covers the repayments with nothing spare, which almost no lender will accept. Above 1.0 means there is surplus; below 1.0 means the income does not cover the debt.
What DSCR Do Lenders Want?
It varies by lender, asset type and how the facility is structured, but as a general guide commercial mortgage lenders look for something in the region of 1.25 or better. Riskier asset classes, shorter leases or weaker covenants push the required ratio higher.
Two points that catch people out:
- Lenders often stress test the ratio at a higher interest rate than the one you are actually being offered, to check it still holds if rates rise
- “Net operating income” means income after running costs — service charges, insurance, management, void allowances. Using gross rent will flatter the ratio and the lender will correct it
In practice DSCR is frequently what caps the loan rather than the loan to value. A property can comfortably pass an LTV test and still fail on income coverage.
For residential investment property, lenders more often use ICR, a closely related measure.
Read more about commercial mortgages, or speak to a broker.
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