What Is DSCR? The Debt Service Coverage Ratio for Canadian Rental Properties

The debt service coverage ratio (DSCR) measures how many times a property’s net operating income covers its mortgage payments. It is calculated by dividing annual net operating income (NOI) by annual debt service, meaning every principal and interest payment made in the year. A DSCR of 1.00 means the rent left after operating expenses pays the mortgage exactly, with nothing to spare. A DSCR of 1.25 means the building earns 25% more than its mortgage costs.

Lenders care about DSCR because on a commercial rental (in Canada, usually five units or more) they lend against the building’s income, not mainly against your salary. If the property can’t carry its own debt, the lender is relying on you to top it up every month. CMHC calls the same measure the debt coverage ratio (DCR); the two terms mean the same thing.

To calculate DSCR, divide one year of net operating income by one year of mortgage payments:

DSCR = Net operating income ÷ Annual debt service

1. Start with gross potential rent: every unit at its rent for 12 months, plus parking, laundry and storage income.
2. Subtract vacancy and bad debt to get effective gross income. Lenders typically use at least 3–5% even if your building is full.
3. Subtract operating expenses: property taxes, insurance, utilities you pay, repairs and maintenance, property management, snow removal, landscaping and admin. The result is NOI.
4. Total the mortgage payments for the year, principal and interest together.
5. Divide NOI by debt service.

NOI does not deduct mortgage payments, income tax, depreciation (capital cost allowance) or one-time renovation spending. Those items are left out so that the same building has the same NOI whoever owns it and however it is financed.

Here is an 8-unit building listed at $1,950,000 with rents of $1,750 per unit. The buyer wants a conventional mortgage at 75% loan-to-value: $1,462,500 at an illustrative 4.9% over a 25-year amortization. Canadian fixed mortgage rates compound semi-annually, which works out to a monthly payment of $8,422.91.

$107,040 ÷ $101,075 = 1.06. The building covers its mortgage, but only by 6%. One unexpected repair or a few months of extra vacancy would leave the owner paying out of pocket, and most lenders would not approve this loan as requested.

Most Canadian lenders want a DSCR of at least 1.20 to 1.30 on a conventional (uninsured) multi-unit mortgage, and CMHC-insured loans have minimums from 1.10 to 1.30. The exact figure depends on the lender, the number of units and the mortgage term.

Two details catch investors out. First, lenders recalculate NOI with their own assumptions: often a 5% vacancy allowance and a 3–5% management fee even if you manage the building yourself. In our example, moving vacancy from 3% to 5% alone drops DSCR from 1.06 to 1.03. Second, some lenders test the payment at a rate above your contract rate. At 5.9% instead of 4.9%, the same loan’s DSCR falls to 0.96.

Lenders work DSCR backwards to set the largest loan the building’s income can support, then lend the lower of that amount and their loan-to-value limit. The maximum annual payment is NOI divided by the required DSCR. The maximum loan is whatever mortgage that payment can carry at the lender’s rate and amortization.

Maximum annual payment = NOI ÷ Required DSCR

For the 8-unit building: $107,040 ÷ 1.20 = $89,200 a year, or $7,433 a month. At 4.9% over 25 years that supports a loan of about $1,290,700, which is 66% of the price, not 75%. The buyer needs a down payment of about $659,300 instead of $487,500: $171,800 more cash. At a 1.25 requirement, the maximum loan drops again to about $1,239,000 (64% loan-to-value).

This is why DSCR, not the advertised loan-to-value, is usually the number that decides how much cash a Canadian multiplex purchase takes when cap rates are low relative to mortgage rates.

You can raise DSCR by increasing NOI or by lowering the annual mortgage payment. Using the 8-unit example (DSCR 1.06 on a $1,462,500 loan), here is what each lever does:

• Negotiate the price. At 75% loan-to-value, the building reaches a 1.20 DSCR at a price of about $1,721,000, roughly $229,000 below asking. That price is a useful anchor for an offer.
• Lengthen the amortization. A 30-year amortization lowers the payment to $92,618 a year and lifts DSCR to 1.16. That helps, but here it is still short of 1.20.
• Put more money down. At 65% loan-to-value, DSCR is 1.22.
• Raise NOI. Reaching 1.20 on the full 75% loan needs NOI of $121,290, which is $14,250 more a year or about $148 per unit per month. Sources include rents brought to market on turnover, paid parking, laundry and storage, or lower insurance and utility costs.
• Find a lower rate or a different program. CMHC-insured financing has lower DSCR minimums on 5–6 unit purchases, in exchange for an insurance premium.

DSCR answers whether the building can carry its debt. It is a safety and financing measure, not a return measure. Cap rate (NOI ÷ price) tells you what the building earns relative to what you pay for it, before financing. Cash-on-cash return (annual cash flow ÷ cash invested) tells you what your own money earns after the mortgage.

A deal needs to pass all three: a strong cap rate with a thin DSCR is a financing problem, and a healthy DSCR with a low cash-on-cash return means your cash is working hard for little. See cap rate vs. cash-on-cash return for how leverage separates the two.

PropStack calculates DSCR for every year of a 10-year projection, using Canadian semi-annual compounding and mortgage renewals at the end of each term, so you can see whether coverage improves as rents grow or tightens at renewal. The deal score checks DSCR against your own target (1.25 by default), and the “price that works” figure solves for the purchase price that reaches a 1.20 DSCR.

You can try it without an account: paste a listing link or enter a deal. Expenses start from regional benchmarks, and you can adjust every assumption.