Cover ratios and metrics
Debt yield
Net operating income divided by the loan amount. A rate-agnostic sanity check on whether a commercial mortgage stays serviceable when rates rise.
Debt yield is net operating income divided by the loan amount, expressed as a percentage. It is the belt-and-braces metric UK commercial mortgage lenders apply on top of LTV and ICR or DSCR to catch one specific risk: that the cover ratios are flattered by a temporarily low interest rate environment.
How it is calculated
Debt yield = Net operating income / Loan amount
It is rate-agnostic. Debt yield does not move when interest rates move, which is the whole point.
Why lenders care
ICR and DSCR both fluctuate with interest rates. A 1.50x DSCR at 5.5% becomes 1.20x DSCR at 7.0% on the same property and same cash flow. Debt yield is the metric that sits underneath, asking the question: if the loan refinanced today onto a normalised long-run rate, would it still cover.
Typical UK debt yield thresholds
- Investment commercial, prime: 8.5 to 9.5%.
- Investment commercial, secondary: 9.5 to 10.5%.
- Specialist (semi-commercial, mixed-use, HMO blocks): 10.0 to 12.0%.
- Owner-occupier: debt yield is less common; DSCR is the binding test.
A worked broker example
A Bristol high-street retail unit let to a regional covenant tenant. Net operating income 95,000 per annum. Loan size 950,000. Debt yield is exactly 10.0%.
If the same property had a 1.2 million loan against the same 95,000 income, debt yield drops to 7.9%, and the loan fails most institutional lender debt-yield thresholds, even if LTV and ICR (at today’s rate) both clear. The lender either trims the loan or declines.
Debt yield versus cap rate
Cap rate is income divided by property value. Debt yield is income divided by loan. They look similar but answer different questions. Cap rate tells you whether the asset is sensibly priced. Debt yield tells you whether the loan is sensibly sized.