DSCR vs cash-on-cash in Canada
DSCR is the lender’s coverage test: NOI divided by annual mortgage payments. Cash-on-cash is your year-one cash yield on money in. In Canada you also re-run DSCR at the qualifying rate — the higher of contract plus 2% or 5.25%.
DSCR
Debt service coverage ratio is NOI ÷ annual debt service. Lenders commonly want 1.10x to 1.25x or better. Below 1.0x the building does not pay its own mortgage. This desk treats 1.15x as a warning zone on the contract rate.
Cash-on-cash
Annual pre-tax cash flow divided by cash in — down payment plus closing costs. It answers what you earn on the cheque you write, not what the building earns unlevered (that is cap rate).
The Canadian qualifying rate
OSFI’s stress test underwrites you at the higher of your contract rate plus two percentage points, or 5.25%. A deal that clears 1.20x at 5.3% contract can fail at 7.3% qualifying. Always read both rows.
When they disagree
High leverage can lift cash-on-cash in year one and crush DSCR. A large down payment can produce a sleepy cash-on-cash and a comfortable DSCR. Price and hold decisions need both: the lender’s covenant and your cash yield.
Questions
- Which number should I underwrite to?
- Both. If DSCR fails at the qualifying rate, most lenders will not fund. If cash-on-cash is thin after a real down payment and closing costs, you are buying a job, not a yield.
- Why does AssetAvenue show a Q row?
- The Q row is the payment at the qualifying rate. Canadian residential underwriting uses that rate even when your contract quote is lower.
- Is cash-on-cash the same as cap rate?
- No. Cap rate is NOI ÷ price and ignores debt. Cash-on-cash is levered cash flow ÷ cash invested.
Run DSCR at the qualifying rate
Analysis for information only. Not lending, tax, legal, or investment advice. Confirm current CMHC and OSFI rules with a licensed advisor.