Underwriting Canadian Rentals with DSCR (Not Cap Rate)
Canadian residential lenders moved from cap-rate-only underwriting to DSCR (Debt Service Coverage Ratio) over the past 24 months. Every mortgage decision over 4 units now lands on DSCR, and most banks stress-test at +200 bps above the contract rate.
DSCR — the formula
DSCR = Net Operating Income ÷ Annual Mortgage Debt Service. NOI = gross rent − vacancy − operating expenses (excluding mortgage). Annual debt service = P+I, 12 months.
What lenders want to see
1.20x on residential 5+ unit. 1.25x on commercial. 1.15x stretches available on stabilized assets with > 3 years operating history. Below 1.10x — expect rejection or a much higher rate.
The stress test
Lenders re-run DSCR at the contract rate + 200 bps. If your 5.0% mortgage models at 1.22x, the lender will stress at 7.0% and require ≥ 1.10x at the stressed rate. Plan for it.
Operating-expense ratios lenders use
Most Canadian lenders apply a default 35-40% OPEX ratio if you can't substantiate lower with audited financials. New-build condos: closer to 25-30% (no roof, no exterior). Older multiplex: 40-45%.
The CMHC twist
Insured commercial mortgages (CMHC MLI Select) allow DSCR down to 1.10x AND 95% LTV when the property meets affordability + energy targets — a substantial advantage for small landlords willing to commit to rent caps.
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Start free trialCommon questions
QWhat's a good cap rate in Canada?
Major urban markets (Toronto, Vancouver) sit at 3–4%. Secondary markets (Calgary, Halifax, Winnipeg) trend 5–7%. Tertiary markets can reach 8%+. Compare to the 10-year GoC bond + a 3–4% risk premium as a sanity check.
QShould I incorporate my rental property?
Usually no for under 3 doors — the cost of incorporation outweighs the tax benefit. For 4+ doors or short-term rentals operating as a business, a corporation often pays for itself by year 2. Talk to a CPA.