Commercial Property DSCR Explained
DSCR (Debt Service Coverage Ratio) is the core commercial serviceability test — how comfortably net income covers the repayments a lender uses for assessment.
If you want a quick model, use our Commercial Property Calculator. For lender-fit advice on your deal, speak with a commercial property broker.
General information only — not financial, legal or tax advice. Always confirm assumptions, fees and lender policy for your scenario.
Get a lender-fit DSCR view
1) DSCR in plain English: why lenders care
DSCR stands for Debt Service Coverage Ratio. In commercial property lending it’s the “breathing room” test: how comfortably the income covers the loan repayments.
DSCR = Net Operating Income (NOI) ÷ Annual Debt Service
NOI is the property income after realistic allowances. Debt service is the repayments the lender uses for assessment (often stressed).
DSCR is central because commercial lenders are underwriting the loan’s ability to survive stress — rate rises, vacancy, a tenant leaving, or higher expenses. It’s also why the same property can be “yes” with one lender and “no” with another: the inputs and buffers differ.
If you’re modelling scenarios, start with our Commercial Property Calculator. If you want the lender-fit view (which lenders accept your income story and which won’t), talk to a Commercial Mortgage Broker.
2) How lenders calculate DSCR in practice
On paper DSCR looks simple, but lenders rarely use a “perfect world” NOI or your exact quoted rate. A typical DSCR build looks like this:
| Step | What the lender is doing | Worked example (indicative) |
|---|---|---|
| 1) Start with rent | Use the executed lease / rent schedule (not a broker’s estimate). | $220,000 gross rent |
| 2) Apply allowances | Vacancy factor, management allowance, and conservative treatment of expenses. | Less 5% vacancy ($11,000) and $24,000 costs |
| 3) Arrive at NOI | Net income the lender is willing to rely on for serviceability. | NOI = $185,000 |
| 4) Calculate debt service | Repayments at a stressed rate and sometimes principal & interest over a set term. | Loan $1.80m assessed at 9.0% IO → $162,000 p.a. |
| 5) DSCR result | NOI ÷ debt service. | DSCR = 185,000 ÷ 162,000 = 1.14 |
Two important nuances:
- “Debt service” may be harsher than your actual repayment. Some lenders assess on principal & interest even if you request interest-only, or they model a shorter amortisation (e.g., 15 years) to see if the loan is sustainable long term.
- NOI can be shaded. Short WALE, incentives, arrears, or weak tenant strength can lead to a rent haircut or higher vacancy factor. If your lease quality is a question mark, see lease-doc vs full-doc commercial loans and the wider commercial lending criteria.
3) The stress tests that usually move the needle
If you want your approval to survive credit scrutiny (and avoid surprises at annual review), model DSCR with stress. The most common stress levers are:
Lenders often assess at a higher rate than today’s headline offer. This protects both sides if rates rise. If the market is uncertain, buffers tend to be less forgiving — see the market outlook for commercial property.
Even when you request interest-only, credit may test principal & interest over a set amortisation. That can materially reduce DSCR and the maximum lendable amount.
Shorter WALE or tenant concentration can lead to vacancy allowances or rent haircuts. This is where a “good looking” rent roll can become a conservative NOI.
Non‑recoverable outgoings, management fees and maintenance are often normalised. If the expense story isn’t clean, lenders assume it will be higher — reducing NOI.
DSCR also interacts with security. A lower valuation can force a smaller loan or higher deposit, which changes repayments and DSCR. For the security side of the equation, read commercial property LVR & deposits and the commercial property valuation process.
4) What DSCR do lenders “want”?
There is no single DSCR target because lenders price and approve risk differently. Still, DSCR tends to cluster into bands depending on lease quality, asset type and whether the borrower is relying on rent-only servicing.
| Scenario | Why the target changes | Indicative DSCR comfort zone |
|---|---|---|
| Prime tenant, longer lease | Income is viewed as more reliable; vacancy risk is lower. | ~1.15–1.25 |
| Standard investment (multi-tenant) | More moving parts; allowance for churn and downtime. | ~1.20–1.35 |
| Short WALE / specialised / volatile sector | Higher stress assumptions and tighter credit appetite. | ~1.30+ (often higher) |
| Owner-occupier reliant on business income | Servicing is driven by business financials and global cash flow, not rent. | Varies (global servicing focus) |
These bands are indicative only. Lenders may calculate NOI and repayments differently, and some will apply industry/location overlays. If you’re unsure where you sit, run the Business Loan Eligibility Check first.
5) Practical ways to improve DSCR
Improving DSCR usually comes down to increasing the income lenders accept, reducing the repayments they assess, or both. The best lever depends on whether you’re buying, refinancing, or responding to a covenant test.
- Strengthen the lease pack: executed lease, rent schedule, evidence rent is paid, incentives and outgoings clearly documented.
- Reduce uncertainty: renew early, reduce tenant concentration, and make vacancy assumptions defensible.
- Normalise expenses: show realistic non‑recoverable costs so credit doesn’t assume worse.
- Lower the loan amount: larger deposit, cash buffer, or additional security (where appropriate).
- Adjust structure: term, amortisation, interest-only period, or split facilities to create headroom.
- Refinance strategically: if the current facility is mis‑shaped, see commercial property refinance.
DSCR isn’t assessed in isolation. If your DSCR is “fine” but the lease is short or the asset is hard to value, lenders can still reduce LVR or tighten conditions. That’s where covenants and annual reviews and valuation sensitivity become part of the strategy.
6) Where a broker adds value on DSCR
Borrowers often focus on the interest rate, but credit focuses on repayability under stress. A specialist broker’s value is in lender-fit: choosing lenders whose DSCR method matches your scenario, and packaging the submission so the income story is credit-ready.
Want a lender-fit view on DSCR, lease risk and valuation sensitivity for your deal? Start with a Commercial Mortgage Broker Australia.
7) Tools & next steps
Use the commercial loan calculator to test DSCR under different rates and loan amounts.
Read the Commercial Property Finance Guide for lender criteria, documents and timelines.
Not sure where you fit? Check eligibility for a business loan before you apply.
See how lenders think about serviceability and structure in our SMSF commercial property case study.
If the DSCR works but the deposit doesn’t, review LVRs and deposits for commercial property loans.
FAQs
What is DSCR in a commercial property loan?
DSCR (Debt Service Coverage Ratio) is a lender serviceability test that compares net income to annual debt repayments. A DSCR above 1.0 means income exceeds repayments; lenders usually want headroom above 1.0 to allow for rate rises, vacancies or higher expenses.
How do lenders calculate DSCR for commercial property?
Most lenders start with net operating income (rent less allowances and non‑recoverable costs), then divide it by repayments calculated on stressed assumptions (higher interest rate, sometimes principal & interest over a shorter term). The exact add-backs, vacancy allowances and buffers vary by lender and asset type.
What DSCR do Australian lenders typically look for?
There isn’t one universal number. As a rough guide, many lenders prefer DSCR in the 1.20–1.35 range for standard investment property, with higher requirements where the lease is short, the tenant is weaker, or the asset is specialised. Your lender’s method matters as much as the target.
Is DSCR based on gross rent or net rent?
DSCR is usually based on net income after realistic allowances. Even when outgoings are recoverable, lenders may still apply a vacancy factor, management allowance, or conservative assumptions so the DSCR isn’t built on a perfect‑world rent figure.
Does interest-only improve DSCR?
Often, yes — interest-only repayments are lower than principal & interest, which can lift DSCR. However, lenders may still assess DSCR on principal & interest at a stressed rate (or model a re-test at review), so interest-only doesn’t always ‘solve’ serviceability on its own.
What’s the difference between property DSCR and global DSCR?
Property DSCR focuses on the property’s income versus the property debt. Global DSCR (or global servicing) looks at all business/borrower income and expenses across the group. Owner‑occupier deals often rely more on global servicing than rent-only modelling.
How does vacancy or WALE affect DSCR?
Shorter WALE, tenant concentration or higher vacancy risk can reduce the income lenders accept. That can mean rent haircuts, higher vacancy allowances or stricter DSCR targets. It’s why lease strength (and evidence rent is paid) is as important as the headline rent.
Can I improve DSCR without changing the property?
Sometimes. Common levers include reducing the loan amount (larger deposit or extra security), extending amortisation, changing repayment type, or restructuring facilities. You can also improve the income story with better lease documentation, rent evidence, or realistic expense treatment.
Is DSCR tested again after settlement?
Many commercial facilities include covenants and annual reviews where the lender re-tests risk. That can include DSCR (and LVR) based on updated financials, lease status and sometimes valuation. Building headroom at approval reduces the chance of stress later.