Debt service coverage ratio and interest cover, explained
Two ratios decide how much most commercial mortgage lenders will lend. If your business trades from the property, it is debt service cover. If the property is let to a tenant, it is interest cover. Here is how each is worked out, what lenders look for, and what to do if you are short.
The two tests at a glance
| Test | Used for | The sum | Typical minimum |
|---|---|---|---|
| Debt service coverage ratio (DSCR) | Owner-occupiers and trading businesses | Adjusted EBITDA ÷ annual payments on all debts | 1.25 to 1.5 |
| Interest cover ratio (ICR) | Property let to a tenant | Annual rent ÷ annual interest at a stress rate | 125% to 145% |
Both are then capped by loan-to-value. Whichever limit is lower decides the loan.
Debt service coverage ratio (DSCR)
DSCR = cash available for debt payments ÷ annual debt payments
- Cash available is usually adjusted EBITDA: profit before interest, tax, depreciation and amortisation, adjusted for things like rent you will stop paying. How to work out EBITDA. Some lenders also deduct tax and essential capital spending.
- Annual debt payments means capital and interest over a year on the new mortgage plus every other debt you are keeping: business loans, vehicle and equipment finance, government-backed loans.
A DSCR of 1.35 means that for every £1 of debt payments, the business generates £1.35. The 35p is the lender's cushion if trade dips or costs rise.
| DSCR | What it tells a lender |
|---|---|
| Below 1.0 | Profit doesn't cover the payments. A decline. |
| 1.0 to 1.24 | Tight. Most lenders decline; a specialist may look at it with strong security or other income. |
| 1.25 to 1.5 | The usual minimum range, depending on the lender and the sector. |
| 1.5 to 2.0 | Comfortable. |
| Above 2.0 | Strong. Helps when negotiating rate and terms. |
Example: £400,000 for a business making £70,000
Adjusted EBITDA £70,000. The business wants £400,000 at 7.5% over 20 years and has van finance of £800 a month.
Mortgage payments: £38,668 a year. Van finance: £9,600. Total debt payments: £48,268.
DSCR = £70,000 ÷ £48,268 = 1.45. That passes a lender wanting 1.35, but fails one wanting 1.5.
How much you could borrow at a given DSCR
Turn the sum around: divide your cash available by the lender's minimum, take off your other debt payments, and what is left is the most you can pay towards the mortgage each year.
Same business, lender wanting 1.35
£70,000 ÷ 1.35 = £51,852 a year for all debts. Less £9,600 van finance: £42,252 for the mortgage, about £3,521 a month.
At 7.5%, that supports about £437,000 over 20 years, or about £476,500 over 25 years. Then the loan-to-value cap applies.
Five ways to improve your DSCR
- Take a longer term. In the example, stretching to 25 years drops the mortgage to £35,472 a year. The DSCR rises to 1.55, which passes even a lender wanting 1.5. Most lenders let you overpay later.
- Clear small debts first. Paying off the van finance before applying lifts the most this business could borrow at 1.35 from about £437,000 to about £536,000 over 20 years. Small monthly debts cost far more borrowing power than their balance suggests.
- Put down a bigger deposit. A smaller loan means smaller payments.
- Use interest-only or part-and-part. Lower payments mean a higher ratio, but check how the lender tests it: some still assess on a full repayment basis.
- Show the up-to-date picture. If profit has grown since your last filed accounts, send current management accounts. If last year was a one-off dip, explain why and show the recovery.
Interest cover ratio (ICR) for investment property
When the property is let to a tenant, the lender looks at the rent rather than your business profit. The test is annual rent ÷ annual interest at a stress rate, usually the actual rate plus one or two points. Lenders test the interest even on a repayment loan.
Example: a shop let at £40,000 a year
Loan wanted: £350,000. Stress rate: 8.5%. Interest at the stress rate: £29,750 a year.
ICR = £40,000 ÷ £29,750 = 134%. That passes a lender wanting 125%, but fails one wanting 140%.
At 140%, the most this rent supports is about £336,000 (£40,000 ÷ 1.40 ÷ 8.5%).
The quality of the rent matters as much as the number. A long lease to a strong tenant is worth more to a lender than the same rent on a short lease or a new business. With a lease ending soon, a lender may discount the rent or decline.
Which test applies to you?
- Your business will trade from the property: debt service cover, using your business's profit. Owner-occupier or investment?
- You will let it to a tenant: interest cover, using the rent.
- Shop with flats above, or other mixed use: usually interest cover on the combined rents. Semi-commercial and mixed-use property.
- Pubs, hotels, care homes and other trading businesses: debt service cover, and the property is often valued on its profit too.
Work out your own ratio
Run your numbers. The how much can I borrow calculator runs both tests: profit cover for owner-occupiers and rent cover for investors, capped by loan-to-value. To see how the monthly payment in the sum is worked out, read how commercial mortgage repayments are calculated.
Lenders set their own minimums and their own adjustments, so the same business can pass with one and fail with another. An adviser can run your figures against several lenders' tests before you apply. Speak to an adviser.
A note on the numbers. Rates, loan-to-value limits, fees and criteria are typical figures at the time of writing (2026). Commercial lending is priced case by case, so your own terms depend on the property, the business, the tenant and you. This is information, not advice, and not an offer of finance.
Quick answers
What is a good debt service coverage ratio?
Most commercial mortgage lenders want at least 1.25 to 1.5, meaning the business generates £1.25 to £1.50 for every £1 of annual debt payments. Above 1.5 is comfortable; above 2 is strong.
How do you calculate DSCR?
Divide the cash available for debt payments, usually adjusted EBITDA, by the total annual capital and interest payments on all the business's debts, including the new mortgage. £70,000 ÷ £48,268 gives a DSCR of 1.45.
What is the difference between DSCR and interest cover?
DSCR tests a trading business's profit against all its debt payments, capital and interest. Interest cover tests the rent from a let property against the interest alone, usually at a stress rate one or two points above the actual rate.
What counts as debt service?
The capital and interest due over a year on every debt the business is keeping: the new mortgage, other loans, vehicle and equipment finance, and government-backed loans.
Can I get a commercial mortgage with a DSCR below 1.25?
Some specialist lenders may consider it with strong security, other income or a low loan-to-value, but most decline. A longer term, clearing small debts or a bigger deposit can often lift the ratio above the minimum.
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