Glossary
Debt service cover ratio (DSCR)
Also called: DSCR, debt service coverage
Debt service cover ratio divides net operating income by total debt service, which is interest plus scheduled principal repayments. It is a stricter test than interest cover because it asks whether income can meet the full repayment obligation, not just the interest.
An example
A borrower with a principal-and-interest commercial loan adds the year's interest and principal instalments together. The property's net income is divided by that total. If income only just covers interest, the debt service ratio will be noticeably weaker.
Why it matters
Lenders use debt service cover when a loan amortises or when they want comfort that the debt will reduce over time. It also appears as a covenant in loan agreements. Understanding both ratios helps a borrower see how a change in rent or rate would affect the loan.
Points to check
Ask which income the lender counts, how it treats vacancies and whether it uses current or projected rent. Check the frequency of covenant testing during the term and what happens if the ratio falls below the required level, such as a requirement to reduce the loan. Test how your ratio would change if the rate rose or a major tenant left, using the interest cover calculator as a starting point.
Try it: Interest cover calculator