Interest cover ratio and DSCR on a commercial mortgage
Interest cover and debt service cover are the affordability tests at the heart of commercial property lending. Where a residential mortgage is sized on a househ
Key takeaways
- The interest cover ratio, ICR, is the property's rental income divided by the interest bill; it tests whether the rent comfortably covers the loan's interest.
- DSCR, the debt service cover ratio, goes a step further and divides income by the full debt service, capital and interest, where the loan repays as well as pays interest.
- Most commercial lenders want an ICR comfortably above 125 to 145 percent, measured on a stressed interest rate well above the pay rate, not on today's rate.
- Because rent is yield times price, the cover test often decides the loan before loan to value does, which is why keener-yielding assets support proportionately less debt.
Interest cover and debt service cover are the affordability tests at the heart of commercial property lending. Where a residential mortgage is sized on a household salary, a commercial investment loan is sized on whether the property's rent can service the debt, and the interest cover ratio, with its close relative the debt service cover ratio, is how lenders measure that. Understanding the two ratios, and the stress the lender applies to them, is the difference between knowing what a property can borrow and guessing.
This guide explains what the interest cover ratio and DSCR are, how they are calculated, why lenders stress them above the pay rate, what counts as an acceptable ratio, and how the cover test interacts with loan to value to decide the loan. We arrange commercial mortgages on industrial property as a broker and introducer; we are not a lender, and nothing here is financial advice. Lending figures and ratios are indicative and vary by lender, asset and borrower profile. This article supports our pillar guide on mezzanine finance and our explainer on what a commercial mortgage is.
What is the interest cover ratio on a commercial mortgage?
The interest cover ratio, almost always shortened to ICR, is the annual rental income of a property divided by the annual interest on its loan, expressed as a percentage or a multiple. An estate producing £100,000 of rent with a £70,000 interest bill has an ICR of roughly 143 percent, or 1.43 times. It answers one question the lender cares about above all on an investment loan: does the rent comfortably exceed the interest, with a margin to absorb voids, costs and a rise in rates?
The ICR is the binding affordability test on most commercial investment mortgages because the lender is repaid from the property's income, not the borrower's salary. A high ICR means the rent covers the interest with room to spare, so the loan is resilient; an ICR close to 100 percent means the rent barely covers the interest, with no cushion, which a lender will not accept. The ratio is calculated on net rental income, after any non-recoverable costs, against the interest bill the lender chooses to test, which is rarely the actual pay rate.
What is DSCR and how does it differ from interest cover?
The debt service cover ratio, DSCR, divides income by the full debt service rather than by interest alone. Where the ICR asks whether the rent covers the interest, the DSCR asks whether it covers the interest plus the capital repayment, the total the borrower actually pays each year. On an interest-only loan the two ratios are the same, because there is no capital element; on a capital and interest loan the DSCR is the tougher test, because the denominator is larger.
| Measure | Income divided by | When it bites hardest |
|---|---|---|
| ICR | Interest only | Interest-only investment loans |
| DSCR | Interest plus capital repayment | Capital and interest loans, and owner-occupier deals |
Which ratio a lender uses depends on the loan and the borrower. Investment lenders pricing interest-only facilities tend to lead with the ICR; lenders funding amortising loans, and most owner-occupier lending where the test is run against the trading business's profit, lead with DSCR. The terminology varies between lenders, and some use interest cover and debt service cover loosely, so the practical step is always to ask which figure a lender is testing and at what rate, because the two can give very different headroom on the same property.
Why do lenders stress the ratio above the pay rate?
Lenders do not test cover at the rate the borrower actually pays. They test it at a higher stressed rate, a notional interest rate set above the pay rate, to check the loan would still service itself if rates rose or the borrower had to refinance into a dearer market. A loan that covers comfortably at today's 6 percent might fail at a stressed 8 or 9 percent, and it is the stressed figure that decides what the lender will advance. This is why a borrower's own sums, run at the pay rate, can look healthier than the lender's.
Run your cover at the rate you pay and the loan looks easy; run it at the rate the lender stresses and you discover what the property can really borrow.
The stress is the lesson of the rate cycle. The repricing of 2022 to 2023, when interest rates rose sharply across UK property, caught out borrowers whose loans covered at low rates but not at higher ones, and lenders have held a meaningful stress margin ever since. For the borrower the practical move is to test the property at a stressed rate before applying, so the loan is sized to what will actually pass rather than to what looks affordable at the current pay rate. Our commercial mortgage calculator lets you test payments against different rates.
What is an acceptable interest cover ratio?
Most commercial lenders want an ICR comfortably above 125 to 145 percent on a stressed interest rate, with the exact floor depending on the asset, the tenant and the lender. Stronger income, a long lease to a solid covenant on a prime estate, justifies a lower required ratio because the rent is more dependable; weaker or shorter income pushes the required ratio up. A ratio of 125 percent on a stressed rate is a common minimum for resilient investment stock, while specialist or short-let assets may need 150 percent or more.
Read the ratio as a margin of safety, not a hurdle to clear by a whisker. An ICR of 125 percent means the rent could fall by a fifth before it stopped covering the stressed interest, which is the cushion the lender is buying. A borrower aiming to maximise leverage will push the ratio toward the floor, but a property held close to its cover limit has little room for a void or a rate rise, so the prudent investor leaves headroom above the minimum rather than borrowing to it.
How do interest cover and loan to value interact?
Loan to value and interest cover are the two limits on every commercial investment loan, and the loan is set by whichever bites first. Loan to value caps the loan as a share of the property's worth; interest cover caps it as a share of the property's income. On industrial investment property the cover test is often the binding constraint, because the rent has to stretch across a stressed interest bill, and the keenest-priced assets produce the least rent per pound of value.
This is the yield-and-cover trade in one line. Because rent is the yield times the price, a higher-yielding asset throws off more rent per pound of value and so supports more debt before the cover floor is hit, while a keener-yielding prime asset, though safer, supports proportionately less. Our guide on industrial property yields works through the same relationship from the yield side, and the two articles together explain why two equally valuable estates can borrow very different amounts.
The practical conclusion is to size debt on cover, not on loan to value alone. A buyer who assumes the headline loan to value will be available may be disappointed when the cover test cuts the loan, so we model both limits across our lender panel before an offer goes in. For the wider picture of how a commercial loan is assessed, see our explainer on what a commercial mortgage is and our commercial mortgages page.
Interest Cover and DSCR Explained: common questions
What is an acceptable interest cover ratio?
Most commercial lenders want an interest cover ratio comfortably above 125 to 145 percent measured on a stressed interest rate, not on the pay rate. Resilient, well-let investment property with a strong covenant can pass at the lower end, around 125 percent, while specialist or short-let assets often need 150 percent or more. A ratio near 100 percent, where the rent only just covers the interest, is below the lendable threshold because it leaves no cushion for voids, costs or a rise in rates. The exact floor depends on the lender, the asset and the tenant.
What is the interest coverage ratio for a mortgage?
On a commercial mortgage the interest coverage ratio is the property's net rental income divided by the interest on the loan, used to test whether the rent covers the debt. Lenders calculate it on a stressed interest rate above the actual pay rate, so a loan that covers at 6 percent must still cover at a notional 8 or 9 percent. The figure is usually expressed as a percentage or a multiple, and most lenders want it comfortably above 125 to 145 percent. On owner-occupier loans the equivalent test runs against the trading business's profit.
What is a 1.5 interest coverage ratio?
A 1.5 interest coverage ratio, the same as 150 percent, means the property's income is one and a half times the interest bill, so the rent could fall by a third before it stopped covering the interest. It is a comfortable, resilient ratio that most commercial lenders would view favourably, and it is often the level required for specialist or shorter-let assets where the income is less certain. The higher the ratio, the larger the safety margin, but a very high ratio can also mean the borrower is under-leveraging the asset.
What is the DSCR 1 percent rule?
The DSCR 1 rule, sometimes loosely called the 1 percent rule, is the minimum point where the debt service cover ratio equals 1, meaning income exactly equals the full debt service of interest plus capital, with no surplus. A DSCR of 1 is the break-even floor, not a target: a lender wants the ratio comfortably above 1, often 1.25 or higher on a stressed rate, so the income covers the repayments with room to spare. A DSCR below 1 means the property does not generate enough to service its own debt, which no lender will fund.
Ready to talk about a real deal?
Send us the deal and we will come back with a view on fundability and likely terms within one working day.