A DSCR (Debt Service Coverage Ratio) loan is a type of financing used by real estate investors to purchase or refinance investment properties. These loans are not based on the borrower’s income or credit score, but instead on the property’s projected net operating income.
The DSCR compares the property’s annual net operating income to its annual debt obligations. For example, if the NOI is £100,000 and the annual mortgage payment is £80,000, the DSCR would be 1.25 (£100,000/£80,000). This means the property generates enough income to cover the mortgage payment with 25% left over.
Lenders want to see a minimum DSCR, usually around 1.20 or higher, to ensure the property generates sufficient income to make the loan payments. The higher the DSCR, the lower the risk for the lender.
Why Do Investors Use DSCR Loans?
DSCR loans allow real estate investors to qualify for financing based on the property’s cash flow alone. Key benefits include:
- Purchase without traditional income requirements – Investors can buy investment properties even if they don’t have enough personal income to qualify for a conventional mortgage. The property’s NOI takes priority.
- Access higher leverage – DSCR loans typically offer loan-to-value ratios up to 80%, compared to 75% for conventional loans. Investors can buy properties with less cash out of pocket.
- Buy and hold strategy – Long-term real estate investors like DSCR loans because they facilitate a buy and hold strategy without needing to refinance into a conventional loan later.
- Flexible underwriting – DSCR programs can offer more flexible underwriting for investors with complex tax returns or those wanting to use projected rents rather than in-place rents.
Comparing UK DSCR Loan Rates
DSCR loan interest rates are typically higher than rates for conventional mortgages on investment properties. This is because DSCR loans are considered higher risk since they are purely based on the property’s projected NOI.
Here is an overview of current DSCR loan rates from some of the top UK lenders:
- Interest rates from 0.43% per month (5.16% APR)
- Loan terms up to 36 months
- Loan amounts £100k to £15 million
BridgeCrowd offers short-term DSCR loans for experienced property investors looking to flip or refinance. Their rates are on the lower end but the terms are shorter.
Octopus Real Estate
- Interest rates from 0.60% per month (7.20% APR)
- Loan terms from 6 months to 5 years
- Loan amounts from £150k
Octopus Real Estate provides DSCR loans to professional property investors and developers. They offer both short-term bridging loans and longer term finance.
- Interest rates from 0.65% per month (7.8% APR)
- Loan terms from 6 to 36 months
- Loan amounts from £75k
Psigma focuses on development finance, bridging loans, and commercial mortgages. Their DSCR rates are competitive but the loan terms tend to be on the shorter side.
- Interest rates from 0.68% per month (8.16% APR)
- Loan terms from 6 to 18 months
- Loan amounts from £75k
Sanucs offers high leverage DSCR loans for experienced property developers and investors seeking fast short-term financing.
- Interest rates from 0.55% per month (6.6% APR)
- Loan terms from 9 to 24 months
- Loan amounts £50k to £15 million
Together is one of the few lenders that offers longer term DSCR loans in addition to short-term bridges. Their rates are very competitive.
- Interest rates from 4.4%
- Loan terms from 3 to 30 years
- Loan amounts up to £5 million
- Interest rates from 4.99%
- Loan terms from 3 to 30 years
- Loan amounts from £1 million
Macquarie offers long term DSCR loans so investors can lock in fixed rates for up to 30 years. But they cater to very large loans and established professional clients.
Factors that Influence DSCR Rates
DSCR loan rates can vary significantly between lenders and programs. The main factors that impact DSCR interest rates include:
Loan Term Length
Longer term loans generally have lower rates. Short term bridge loans will have higher rates but are faster to close.
Loans under £100k tend to have higher rates, while larger loans above £1 million often qualify for the lowest rates.
Loans on apartment buildings and traditional rentals qualify for better pricing than hotels, care homes, or commercial properties.
First-time investors pay higher rates. The strongest borrowers are experienced full-time investors with a proven track record.
Most lenders still check credit as part of underwriting. Borrowers with 700+ scores qualify for the best pricing.
Loan To Value (LTV)
A lower LTV percentage (like 75% instead of 80%) presents less risk and may have a lower rate.
Debt Service Coverage Ratio
A higher DSCR means more cushion to make mortgage payments, equating to a better rate.
By reviewing these factors, investors can get a sense of the rate range they may qualify for with their particular loan profile. The more desirable factors they have, the better the rate.
Common Fees on DSCR Loans
Also called an arrangement fee or underwriting fee. Usually 1% to 5% of the loan amount. Payable upfront at closing.
Covers the lender’s cost of appraising the property. Typically around £3,000.
Lawyer charges for preparing loan documents and conveyancing. Budget around £2,000.
If using a broker, fees range from 1% to 5% of the loan amount.
Early Repayment Charge
Penalties for paying off the loan before the full term ends. Usually declines over time.
Some lenders charge this fee, often 2% to 5%, when the loan is paid off.
For construction loans, lenders may charge 1% to 2% each time funds are drawn down.
Credit Report Fee
Can range from £20-£50 per borrower for the lender to pull credit reports.
Asset Management Fee
On term loans, lenders may charge an annual fee around 2% of the balance to monitor the loan.
Be sure to ask lenders to fully disclose all expected fees in addition to the advertised interest rate. This helps compare true costs.
Steps to Getting the Best UK DSCR Loan Rate
Follow these tips to help secure the lowest rate on a UK DSCR loan:
1. Build your borrower profile
Having 2+ years of real estate investing experience, a 700+ credit score, and a portfolio with 5+ properties will put you in the top tier of borrowers.
2. Target lenders that fit your loan needs
Research lenders aligned with your desired loan amount, term length, property type, and borrower profile.
3. Get loan quotes from 3-5 lenders
Compare interest rates and fees quoted based on your specific situation.
4. Improve your DSCR
Maximize your property’s Net Operating Income and highlight positive factors to increase your DSCR.
5. Offer asset collateral
Lenders may improve rates if you pledge additional property assets as collateral.
6. Pay for points
Some lenders reduce rates if you pay loan discount points upfront at closing.
7. Close near the end of the month/quarter
Ask if lenders can improve pricing to hit internal volume goals.
8. Build a relationship with the lender
Cultivating a long-term relationship with a preferred lender can help earn better loan terms over time.
With an optimized loan profile and thoughtful lender targeting, investors can land very competitive UK DSCR rates and fees. The time taken to shop around and compare options is well worth the interest expense savings.