Cover ratios and metrics
Debt Service Cover Ratio (DSCR)
Net operating income divided by annual debt service. The single most-watched cover ratio on UK owner-occupier and trading-business commercial mortgages.
Debt Service Cover Ratio is net operating income divided by annual debt service. On a UK commercial mortgage it is the test a lender uses to ask the only question that actually matters: does the business or property throw off enough cash to comfortably pay the loan.
How it is calculated
DSCR = Net operating income / (annual interest + annual principal, where capital repays)
On interest-only deals the denominator is just annual interest. On capital and interest deals it includes the principal element. Both versions exist in the market and lenders disclose which they use in their heads of terms.
What lenders want on UK commercial mortgages
We see the following bands across the named UK panel:
- Owner-occupier trading freeholds: 1.30x to 1.40x. The business is buying the building it already trades from, so cash flow is well understood.
- Hospitality, care homes, leisure: 1.40x to 1.60x. Cash flow is goodwill-heavy and concentrated in the owner-operator, so lenders ask for more headroom.
- Investment property: lenders flip to ICR rather than DSCR. See the ICR entry.
A worked broker example
A West Midlands trading freehold purchase. Price 1.4 million, 70% LTV (980,000 loan), 5-year fix at 6.3% per annum interest-only. Annual debt service is 61,740. To clear 1.30x DSCR the business needs 80,262 of net operating profit. To clear 1.40x it needs 86,436. That EBITDA number sets the affordability boundary, not the headline 6.3%.
The trap brokers see most often is owners reading the headline rate and assuming a 980,000 loan is sized off the property. It is not. It is sized off whatever EBITDA figure the lender is willing to stress.
Why DSCR matters more than the headline rate
Two deals at the same headline rate price very differently if their DSCR cover differs. A 1.50x DSCR borrower will get a tighter rate and a longer term than a 1.20x DSCR borrower on the same property, because the lender treats them as fundamentally different credits. Brokers who size off LTV alone miss this.