What is the debt service coverage ratio (DSCR)?

Before lending, a lender wants to know whether income pays the debt. The debt service coverage ratio, or DSCR, answers that question with a single number.

This guide gives the formula, published benchmarks and a worked example.

What does the debt service coverage ratio measure?

The DSCR compares what the business or building earns with what it must repay over one year. The higher the number, the wider the cushion.

At 1, all the available income goes to paying the debt. Below 1, there is not enough money to meet the payments.

BDC specifies that at 1, all EBITDA goes to debt service. Nothing is left for a surprise.

What is the formula?

According to BDC, the ratio is calculated as EBITDA divided by the interest and principal due over a period, typically one year.

EBITDA is earnings before interest, taxes, depreciation and amortization. BDC explains that you get it by starting from after-tax earnings and adding those items back.

Principal repaid appears neither on the income statement nor on the balance sheet. It has to come from the loan repayment schedule.

For a rental building, many lenders use net operating income instead. That is rental income minus operating expenses. Ask the lender for its exact definition.

What thresholds do lenders look at?

BDC writes that a ratio of 2 or more is generally considered healthy. A ratio near 1 is considered less healthy.

It adds that a ratio below 2 is a reason to look more closely at what is pulling it down. There is no single cutoff.

According to BDC, interpretation varies from one lender or investor to another. They also take temporary conditions into account.

The CMHC insurance program for standard rental housing offers, according to its page, lower debt service coverage ratios than standard financing. The page gives no figure.

Keep this in mind: no threshold in this article applies to your application. The lender sets its own and puts it in the financing offer.

How do you work through a simple example?

Here is a made-up example to show the calculation. The numbers are fictitious.

• Annual rental income of the building: $200,000.
• Annual operating expenses: $80,000.
• Net operating income: $200,000 minus $80,000, or $120,000.
• Loan payments: $7,500 a month, or $90,000 a year, interest and principal included.

The ratio is $120,000 divided by $90,000. That gives about 1.33.

It means income covers the payments 1.33 times. That leaves $30,000 of cushion before reaching 1.

What if payments rise to $10,000 a month? Debt service reaches $120,000 a year. The ratio then falls to 1.00, with no cushion at all.

Another reading: if a lender aimed for a ratio of 1.25, debt service could not exceed $96,000 a year. That is $8,000 a month, in this example only.

What moves the ratio?

The ratio changes as soon as the top or the bottom of the fraction changes.

• An unpaid rent or a vacant unit lowers income.
• Higher taxes or maintenance raise expenses.
• A higher interest rate at renewal raises payments.
• A shorter amortization raises annual payments.
• A larger down payment shrinks the loan, so payments shrink too.

Because loan size is set first from cash flow, a low ratio limits the amount offered. BDC states that loan size depends first on those flows.

That is why a larger down payment can offset thin income. A smaller loan means smaller payments.

What limits should you keep in mind?

No single ratio tells the whole story, and lenders rarely rely on one number alone. They also weigh credit history, the building and the borrower's experience.

The ratio is a snapshot. It uses past or projected income, and either can be wrong.

It says nothing about tenant quality, building condition or resale value. The lender looks at those points separately.

BDC also notes that definitions vary. The same business can end up with two ratios depending on what goes into the fraction. Always ask which method is used. Write it down next to the figure, so that two calculations made months apart stay comparable.

For a building owner, the ratio is also a decision tool. Before buying, work out the maximum annual payment the income supports with a comfortable cushion.

The calculation runs backward. Pick the target ratio, divide net operating income by that ratio, and you get the annual debt service that is possible.

In our example, $120,000 divided by 1.5 gives $80,000 a year, or about $6,667 a month. That is only a numerical illustration, not a target to aim for.

The loan amount matching that payment then depends on the rate and the amortization. Only the lender can calculate it for your application.

What should you do next?

Work out your own ratio using the real income and expenses of the last twelve months. Use the annual payment shown in an offer or a repayment schedule.

Then repeat the calculation with a higher rate and lower rent. See whether the gap still holds.

If the ratio looks low, compare the loan amount, the amortization and the down payment. Each one acts on the result.

PMECAP is a free comparison site and does not lend. Its request form is passed to a mortgage brokerage firm registered with the AMF.

Keep your calculation sheet and update it each quarter. Next, read the guide on rates and down payment on a commercial loan, then the commercial financing family.

FAQ

Sources

• BDC – What is the debt service coverage ratio (DSCR)? (accessed October 13, 2026)
• BDC – How a bank looks at your business (accessed October 13, 2026)
• SCHL – Assurance prêt hypothécaire pour logements locatifs ordinaires (accessed October 13, 2026)