SAN DIEGO– With mortgage rates rising, a new analysis shows a one-percentage-point increase in a rental property’s mortgage rate could require about 4½ years of rent growth to offset.
Griffin Funding modeled a $300,000, 30-year fixed mortgage on a $400,000 property, with $500 a month in property taxes, insurance and association dues. Raising the mortgage rate from 6.75% to 7.75% increased the rent needed to maintain the same debt-service coverage ratio by 8.3%, Griffin Funding found.
The analysis stated that is equivalent to about 4½ years of growth if rents rise steadily at the 1.8% annual pace recorded for single-family rentals in July. The comparison holds the model’s other assumptions constant; it is not a forecast of future rents.
A Smaller Rate Change, a Larger Rent Requirement
Even a quarter-point increase, from 6.75% to 7%, would require about 2% more rent to maintain the same coverage ratio, Griffin Funding found. At a constant 1.8% annual rent growth rate, closing that gap would take roughly 14 months.
Debt-service coverage ratio, or DSCR, financing evaluates a rental property’s qualifying income against costs that include principal, interest, taxes, insurance and association dues. Griffin Funding used a ratio of 1.25 for its illustration, meaning rent would be 25% higher than those monthly costs. The company said that figure was a modeling target, not a requirement for every loan.
In a second hypothetical example, Griffin Funding assumed a buyer expected $3,000 in monthly rent from a $400,000 house purchased with 25% down. At a 6.75% mortgage rate, the property’s coverage ratio was about 1.23. At 7.75%, it fell to about 1.13, although the expected rent and purchase price had not changed. At a 7.25% rate, reaching the illustrative 1.25 ratio would require about $3,183 in monthly rent — $183 more than expected — or roughly $21,500 more toward the down payment to reduce the loan amount, the analysis found.
That extra down payment would become equity in the property. It would also leave the buyer with less cash available for repairs, vacancies or another purchase.
Borrowing Costs and Rents Move at Different Speeds
As the CU Daily reported, the Federal Reserve voted unanimously Sept. 16 to raise its benchmark interest rate by a quarter-point to a range of 3.75% to 4%, citing elevated inflation.
Fed officials’ September projections placed the median federal funds rate at 4.1% at the end of both 2026 and 2027, above their June projections of 3.8% and 3.6%, respectively. Those projections represent officials’ individual views, not a commitment to a future rate path.
Rent growth has been more gradual. Cotality reported that single-family rents rose 1.8% over the year through July, compared with 2.3% a year earlier. A separate Apartment List measure found that the national median rent across rental types was 0.8% below its year-earlier level in August. The measures cover different properties, but both provide context for Griffin Funding’s finding: a buyer may face a higher financing cost at closing before rental income has time to rise.
