Interest cover ratio

Interest cover is the income test in a property financing: net rental income, or in some documents an adjusted earnings measure, divided by net interest payable. Loan to value asks whether the assets still cover the loan. Interest cover asks whether the rent still covers the interest, and the two fail for entirely different reasons.

Because it uses income rather than a valuation, it does not move when yields widen. A company can breach loan to value on a revaluation while interest cover stands still, and it can breach interest cover on a refinancing while loan to value stands still. Quoting one ratio answers half the question.

The exposure it measures is not the average cost of debt today but the maturity profile. A long fixed rate book is deferral rather than protection, and cover breaks where hedges roll off and debt has to be replaced at market rates. The useful questions are what proportion of debt matures within three years and what it would cost to refinance now.

It is also the test that does not exist for development. A scheme under construction produces no income at all, so there is nothing to cover interest with, which is why development finance rolls interest up into the loan and is sized on cost and projected value instead.