Debt Service Coverage Ratio (DSCR) and Lender Requirements

Investment Fundamentals · 6 min read

Debt Service Coverage Ratio (DSCR) measures whether rental income covers mortgage payments with sufficient margin. It's the primary metric buy-to-let lenders use to assess affordability.

The Formula

DSCR = Net Operating Income ÷ Annual Debt Service

Net Operating Income (NOI) = Gross rent - operating costs (before mortgage)
Annual Debt Service = Total mortgage payments per year

Lender Requirements

Most UK buy-to-let lenders require DSCR of 125-145%. This means rental income must be 125-145% of mortgage payments.

Example: Monthly rent: £1,200 Annual rent: £14,400 Operating costs (25%): -£3,600 NOI: £10,800 Mortgage payment: £750/month = £9,000/year DSCR = £10,800 ÷ £9,000 = 1.20 (120%) This property would fail most lender stress tests requiring 125%+.

Why DSCR Matters

✓ Mortgage approval: Low DSCR = rejection or lower LTV
✓ Interest rate stress test: Lenders model DSCR at higher rates (5.5-7%)
✓ Portfolio expansion: Weak DSCR on existing properties limits new borrowing

Improving DSCR

1. Increase rent (market-driven)
2. Reduce operating costs
3. Refinance to lower interest rate
4. Extend mortgage term (lowers monthly payment)
5. Increase deposit (reduces loan amount)

1st Numbers automatically calculates DSCR for each property and flags those below lender thresholds, helping you plan refinancing or rent reviews strategically.