Two floating-rate, interest-only property loans of similar size: an office tower and a shopping mall. Compute LTV, debt yield and DSCR, stress for a 150 basis point rate rise, and say which you would rather hold.

Hold Tulsivan Towers. It has an LTV of 55%, a debt yield of 11% and a DSCR of 1.47x, which falls to 1.22x after the shock. Rangmahal starts at 65% LTV, an 8.5% debt yield and 1.13x cover, and falls to 0.94x: its income no longer pays the interest. The debt yield is the interest rate at which each loan stops covering itself, so it ranks them before any stress is run.

Think of lending to a landlord who owns one flat. You care how much of the flat's price you have lent (LTV), how big the rent is against your loan (debt yield), and whether this month's rent covers this month's interest (DSCR). LTV depends on a valuation, DSCR depends on the interest rate, and only debt yieldNet operating income divided by the loan amount. It ignores both the property value and the interest rate. depends on nothing but rent and loan size. For Tulsivan: 550 over 1,000 is 55% LTV, 60.5 over 550 is 11.0% debt yield, and 60.5 over interest of 41.25 is 1.47x. For Rangmahal: 65%, 8.46% and 1.13x.

On an interest-only loan, DSCR is NOI over loan times rate, which is debt yield divided by the rate. So DSCR hits exactly 1.0x when the interest rate equals the debt yield. Tulsivan can absorb rates up to 11.0% before its NOI stops covering interest; Rangmahal only up to 8.46%. A 9% rate sits comfortably under the first and above the second. This is why property lenders watch debt yield: it gives the breaking rate in one division.

Higher rates usually push up the yield buyers demand from property, its cap rateNet operating income divided by property value; the yield a buyer earns on the price before financing.. Today Tulsivan is valued at a 6.05% cap rate and Rangmahal at 5.5%. Add one point to each and the values fall to about Rs 858 crore and Rs 846 crore, taking LTV to 64% and 77%. Both loans lose cushion, but Rangmahal's cushion falls to about 23% while its income no longer covers interest: if the borrower cannot inject cash, the lender is looking at a default with a quarter of value as the margin.

The numbers favour the office loan, but the asset types carry different risks the ratios miss. An office building's income depends on a few large tenants, so the lease expiry schedule matters more than today's NOI. If Tulsivan's two biggest tenants leave in year two, its NOI could fall a third and the comfort disappears. A mall's income is spread across many shops but tied to footfall and anchor tenants. Before buying, ask for the lease expiry profile of both, any rate hedge the borrowers hold, and whether the loans carry a cash sweep if DSCR falls below a trigger.