How to calculate business loan and mortgage affordability (ICR, TSDI, EBITDA).

When applying for a business loan or commercial mortgage, affordability is one of the biggest factors lenders consider.

In simple terms:

Affordability is calculated by assessing whether your business generates enough income to cover its borrowing, both now and under stressed conditions.

Most lenders will use one of three methods, depending on how your income is structured:

• ICR (Interest Cover Ratio) for rental and investment income

• TSDI (Total Secured Debt to Income) for income versus secured debt repayments

• EBITDA for assessing business profitability and cash flow

If you understand how these work, you will be in a much stronger position to see how a lender is likely to view your application and where potential issues might arise.

ICR (Interest Cover Ratio)

The first method is ICR, which is used where income is generated by a property rather than a trading business.

What is ICR?

ICR (Interest Cover Ratio), also known as the Interest Coverage Ratio, measures how comfortably income generated by the property covers the interest payments on the loan.

It’s mostly used in commercial mortgage and Buy to Let affordability, particularly where a property is generating rental income. As many investors looking at leasing or letting out a property use interest-only options, the ICR method can be ideal as their monthly repayments are generally lower (and easier to fully cover using the rental income).

The ICR method basically asks whether the property can cover the mortgage interest itself (without any additional income sources such as salary or business profits) and whether there’s a sensible margin in case of potential rate increases, commonly known as stress testing.

Most lenders ask for an ICR of 125% or higher, but Together can consider applications with an ICR of 120%. Additionally, if the property is not currently tenanted, we can accept 90% of the projected rental income.

When do lenders use ICR for affordability?

ICR is typically used for:

• Commercial investment properties

• Semi-commercial properties

• Landlords and portfolio investors

• Limited Companies and SPVs holding rental assets

In these cases, lenders focus less on personal income and more on whether the property can support the borrowing on its own.

How to calculate ICR

The formula for calculating the Interest Cover Ratio is very straightforward and will provide you with a percentage at the end which needs to be higher than the criteria set by your lender.

Formula:

 ICR = (Gross Rental Income ÷ Interest Payments) × 100

Example:

• Monthly rental income: £2,000

• Monthly interest payment: £1,250

ICR = (2,000 ÷ 1,250) × 100 = 160%

In this example, you can see that the property makes 60% more in rental income each month than they would pay in interest on their mortgage. This is a healthy margin that would easily clear most lenders’ ICR criteria (typically 125% or higher).

What do underwriters look for when assessing affordability using ICR?

The Interest Coverage Ratio is not just a number. It is a signal of the risk that the lender is comfortable taking on.

It’s also not a guaranteed approval. Underwriters will typically consider a range of different factors before coming to a decision, including the property type and condition, market factors, and previous experience where necessary.

However, a strong application usually includes:

• Stable rental income

• Reliable tenants

• Clear tenancy agreements

If your application doesn’t look perfect on paper, but you know the numbers make sense, speak to our expert team to see if we can support. Unlike some other lenders, we can consider short leases and vacant units, non-standard or unmortgageable properties in need of repair, and applications that rely on projected rental income (up to 90%).

And, if rental income alone doesn’t quite meet the required ICR, we can consider factoring in additional income, such as salary or business profits. This is known as top-slicing and can help support cases with a strong overall financial profile.

TSDI (Total Secured Debt to Income)

The second affordability assessment is TSDI, which looks at any existing mortgage or loans you may have rather than just whether you can cover the interest. This is your secured debt and doesn’t include credit cards or other unsecured debts.

However, it also allows you to use a range of different incomes, not just rental income, to prove that you can afford the loan. For example, lenders may accept salary, dividends, bonuses, benefits, and rental income.

What is TSDI?

TSDI (Total Secured Debt to Income) measures how much of a borrower’s income is used to cover total debt repayments.

This includes:

• Interest

• Capital repayments

• Existing loans and mortgages

In short, if you have several loans or other outstanding debts, the lender will use TSDI to make sure that you can afford to repay what you already owe AND make the payments on the new loan or mortgage. Unlike ICR, this calculation is made on the capital repayment and the interest.

What’s the difference between TSDI and TDSI?

It might feel like a typo and, for many, the phrases TSDI (Total Secured Debt to Income) and TDSI (Total Debt Service to Income, or Debt Service Ratio) are often interchangeable. But there is a nuanced difference, and it surrounds the use of Secured Debt.

TDSI looks at all debt repayments, so can include unsecured debt and credit cards. TSDI only looks at debt that’s secured against property so can be more forgiving when assessing affordability.

When do lenders use TSDI for affordability?

TSDI is more common in:

• Owner-occupier commercial mortgages

• Trading businesses

• Cases with multiple debts

• Applications supported by personal income

It reflects a more real-world affordability test, especially where the business is operating from the property.

How to calculate TSDI

Here is the simple formula you need to calculate the TSDI (Total Secured Debt to Income).

Formula:

TSDI = (Total Monthly Secured Debt Payments ÷ Gross Monthly Income) × 100

Example:

• Monthly income: £5,000

• Monthly secured debt repayments: £3,000

TSDI = (3,000 ÷ 5,000) × 100 = 60%

In the example above, you can see that the total secured debt takes up 60% of the customer’s monthly income. Lenders will typically ask for a TSDI of 50% or lower (but may consider a higher percentage on referral).

What do underwriters look for when assessing affordability using TSDI?

TSDI helps highlight pressure on cash flow, so it can be a helpful tool for underwriters looking at whether a customer can meet payments now and in the future.

However, there are situations where an underwriter may take a more common-sense approach as context can play an important role.

For example:

• A higher TSDI might still be acceptable if:

• A lower TSDI could still raise concerns if income is unstable.

EBITDA

For trading businesses, lenders often need a deeper understanding of how the business performs day to day. That is where EBITDA comes in.

What is EBITDA?

EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) measures a business’ operating performance.

It’s widely used by lenders assessing business loan affordability, particularly for trading businesses, and shows how much income the business generates before financing, tax and accounting decisions are applied.

Here’s what each part of the acronym means:

• Earnings (E) – This is normally the net profit generated by the business as reported to HMRC.

• Before (B) – This means that you can now add all the costs below to your net profit to get a realistic operating value that lenders can use to see how well your business is performing.

• Interest (I) – This is any interest costs associated with borrowing to fund business operations.

• Tax (T) – This is the tax paid to the government by the business.

• Depreciation (D) – This is the cost of physical business assets such as machinery or vehicles spread over the useful life of the asset.

• Amortisation (A) – This is the cost of non-physical business assets that periodically expire, such as copyrights and software, spread over the useful life of the asset.

When do lenders use EBITDA for affordability?

EBITDA is typically used for:

• Trading businesses

• Owner-occupier cases

• Larger or more complex lending scenarios

• Businesses with multiple income streams

It is particularly useful where affordability depends on business performance rather than rental income.

How to calculate Debt to EBITDA

Firstly, you’ll need to calculate EBITDA using the formula below:

Formula:

EBITDA = Net Profit + Interest + Tax + Depreciation + Amortisation

Next, you can work out your Debt to EBITDA ratio using this formula:

Formula:

Debt to EBITDA = Total Debt ÷ EBITDA

Example:

• Total debt: £600,000

• EBITDA: £200,000

Debt to EBITDA = 600,000 ÷ 200,000 = 3.0x

In this example, you can see that total debt is three times higher than the EBITDA value. Lower ratios generally indicate stronger affordability, as it signals that the company can service the overall debt, including the new funding, easier.

Lenders will typically accept between 2.0x to 4.0x for many SME business cases but may consider higher ratios depending on the overall performance of the sector, the consistency and experience of the business, or the growth potential of the business.

What do underwriters look for when assessing affordability using EBITDA?

EBITDA provides flexibility, but lenders will often adjust the figure to create a clearer view of sustainable income.

For example:

• Adding back one-off costs such as major equipment purchases

• Removing unusual expenses that do not reflect ongoing performance

Emma Goodyear, Senior Corporate Underwriter at Together, explains:

“EBITDA gives us a good indication of how the business has actually performed and will continue to perform in the future.

“We can also look at any relevant add backs, such as a one-off cash purchase, that aren’t representative of the company’s ongoing profitability.

“For example, if the business has purchased some new machinery, which will sit in the business for the next 15 – 20 years, you can add that amount back into their EBITDA as it won’t be an ongoing expense.”

Choosing the right affordability method

Each of these methods looks at affordability in a different way, which is why the approach used will depend on how the income is generated.

• ICR answers: Does the property income cover the loan?

• TSDI answers: Can the borrower afford their secured debt commitments?

• EBITDA answers: Is the business profitable enough to sustain borrowing?

If an application does not meet the criteria under one method, a lender may consider whether it works under another, depending on how the income is structured. However, other lenders will strictly use only one or two of the affordability assessment methods.

A flexible approach to business loan and mortgage affordability

At Together, we’re happy to look at affordability using ICR, TSDI and EBITDA methods. If a case does not quite meet the requirements under one method, we can consider whether an alternative approach could help you get the outcome you want.

The formulas in this article can give you a great insight into your affordability, but, if you’d like to find out exactly how much you can borrow from Together, all we need is a few quick details and our team will get in touch to discuss your needs.