Debt yield, DSCR and ICR explained
Debt yield, DSCR and ICR are the three tests a lender runs on an asset's income to decide how much it will lend. This guide explains each, and how they combine to size the loan.
Debt yield, DSCR and ICR are income-based tests lenders use to size debt on a stabilised asset. Debt yield is the net income as a percentage of the loan, a leverage-independent measure of how much income backs each pound lent. DSCR, the debt service coverage ratio, is the net income divided by the full debt service of principal and interest. ICR, the interest cover ratio, is the net income divided by interest only, often stressed at a higher rate. A lender sizes the loan to the lowest amount these tests and the loan-to-value cap allow, so a stabilised, growing income unlocks more debt at keener pricing. These are commercial measures, not consumer ones.
At a glance
- Debt yieldNet income as a percent of the loan
- DSCRNet income over full debt service
- ICRNet income over interest, often stressed
- PurposeSize and stress the loan on income
- Binding limitThe lowest of the tests and the LTV cap
- Calculator/calculators/debt-yield-dscr/
Why lenders size on income
On a stabilised, income-producing asset the loan is sized off the income, not only the value. The income these tests measure is the net operating income, or NOI: the rent and trading income the asset produces after running costs, before finance. A valuation tells a lender what it could recover in a sale; the NOI tells it whether the loan will be serviced from day to day. So a lender runs three income tests alongside the loan-to-value cap, which the valuation sets, and lends to the lowest amount any of them allows. This is why reaching a stabilised income matters so much: it is the NOI, proven and mature, that the tests measure.
These are commercial measures used on investment property. They are not consumer affordability tests.
Debt yield
Debt yield is the net operating income (NOI) expressed as a percentage of the loan: debt yield equals NOI divided by the loan. If a scheme produces 1 million pounds of NOI and the loan is 15 million pounds, the debt yield is 6.7 percent. It is leverage-independent, meaning it does not flex with the interest rate or the loan term, so lenders use it as a clean measure of how much income stands behind each pound lent. A higher debt yield means a safer loan; lenders set a minimum, and the loan is capped at the amount that meets it.
DSCR and ICR both move with the interest rate, so a falling rate can flatter them and let leverage drift up just as the cycle turns. Debt yield ignores the rate entirely, which is why many lenders use it as a backstop. It answers a blunt question: if we had to take this asset back, how much income would we be holding against our loan?
DSCR and ICR
DSCR, the debt service coverage ratio, divides the net income by the full debt service, the principal and interest the loan requires over the period. A DSCR of 1.0 means the income exactly covers the debt service; lenders want headroom above that. ICR, the interest cover ratio, divides the net income by the interest only, and is often tested at a stressed rate above the actual pay rate so the loan still covers if rates rise. Interest-only investment loans are typically sized on ICR; amortising loans on DSCR.
| Test | What it divides | What it answers |
|---|---|---|
| Debt yield | Net income by the loan amount | How much income backs each pound lent |
| DSCR | Net income by full debt service | Does income cover principal and interest |
| ICR | Net income by interest, often stressed | Does income cover interest with headroom |
How the tests combine to size the loan
A lender works out the maximum loan each test allows, then lends to the lowest of them and the loan-to-value cap. On a strong, stabilised income the binding limit is often the loan to value; on a thinner income, a cover test bites first and caps the loan below the value-based maximum. This is why a stabilised, growing income is worth so much: it lifts every test at once, so more debt is available at keener pricing. You can run the tests against your figures at /calculators/debt-yield-dscr/ and size the resulting loan at /calculators/loan-sizing/.
- Work out the maximum loan the loan-to-value cap allows
- Work out the maximum loan each of debt yield, DSCR and ICR allows
- Lend to the lowest of those amounts, which is the binding constraint
- Improve the binding constraint by growing the income or stabilising the asset
How this shapes a stabilisation deal
During lease-up the income is part-built, so the cover tests are tighter and the leverage is more conservative. As the asset stabilises, the income lifts every test and the take-out term loan can be sized at the standing-asset level. We model the cover tests on the stabilised income before arranging the bridge, so the exit leverage is real and the funding plan holds. We are an arranger, not a lender, and we place each loan with the funder whose tests fit the asset.
Debt yield, DSCR and ICR explained: common questions
What is debt yield?
Debt yield is the net operating income as a percentage of the loan, for example 1 million pounds of income against a 15 million pound loan is a 6.7 percent debt yield. It is leverage-independent, so it does not move with the interest rate, which is why lenders use it as a clean measure of how much income backs each pound lent.
What is the difference between DSCR and ICR?
DSCR, the debt service coverage ratio, divides net income by the full debt service of principal and interest, so it suits amortising loans. ICR, the interest cover ratio, divides net income by interest only, often at a stressed rate, so it suits interest-only investment loans. Both measure how comfortably the income covers the debt.
How do lenders use these tests to size a loan?
They work out the maximum loan each test and the loan-to-value cap allows, then lend to the lowest of them. On a strong stabilised income the loan to value usually binds; on a thinner income a cover test bites first and caps the loan below the value-based maximum. You can run the tests at /calculators/debt-yield-dscr/.
Why does debt yield ignore the interest rate?
Because DSCR and ICR both move with the rate, a falling rate can flatter them and let leverage drift up just as the cycle turns. Debt yield divides income by the loan amount alone, so it stays constant, which is why lenders use it as a rate-independent backstop on how much they will advance.
What debt yield or cover do lenders require?
It varies by lender, sector and the security of the income, with secured, contracted income supporting lower minimums than direct-let or trading income. The point is that a stabilised, growing income lifts every test at once, so more debt is available at keener pricing. All figures we quote are indicative and not an offer of credit.
How do these tests affect a stabilisation loan?
During lease-up the income is part-built, so the cover tests are tighter and the leverage is more conservative. As the asset stabilises the income lifts every test, and the take-out term loan can be sized at the standing-asset level. We model the tests on the stabilised income before arranging the bridge so the exit leverage is real.
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