Debt Service Coverage Ratio (DSCR)

Debt Service Coverage Ratio (DSCR) is the ratio of a property's net operating income to its debt service (principal and interest payments). It's borrowed from commercial real estate finance and increasingly applied to residential investment analysis in Australia as interest rates have risen.

A DSCR of 1.0 means the property's income exactly covers its loan repayments. Below 1.0, the investor must top up from other income; the property is negatively geared on a cashflow basis. Above 1.0, the property pays its own loan and contributes surplus. Most residential lenders don't require DSCR > 1.0 for approval (they assess serviceability based on the borrower's total income), but investors who want properties that don't drain their cashflow should target DSCR of at least 1.0 on their own modelling.

In 2026, with mortgage rates around 6%, achieving DSCR >= 1.0 typically requires gross yields of at least 5.5-6% assuming an 80% loan. That excludes most capital-city houses and concentrates DSCR-positive opportunities in regional and outer metro markets. DSCR is also sensitive to deposit size: a 50% deposit with the same yield can easily push DSCR above 1.5.