All lenders have a formula for assessing your capacity to service a loan. Any loan. It is important to lenders that the loan can be repaid over a certain timeframe and that repayments can be ongoing and on a regular basis – especially in the event of a change in personal circumstances.
1. How is serviceability calculated? The criteria may seem similar between lenders, however each lender will look at your financial situation through their own eyes. Basically, your lender will consider all income (or combined incomes for joint applications), then remove everyday household and other expenses (including those of any dependants) and then add the loan repayment to see if you have the ability to repay.
2. What about investment properties? Most lenders will consider up to 80% of rental property income. This means if you receive $500 each week, only $400 will be factored into your serviceability assessment. However as mentioned in our feature article, because of the extremely low rental vacancy rates in Australia, one of our majors (the first of probably many) has announced they will consider up to 90% of rental property income.
3. What is a serviceability buffer? Lenders understand that circumstances change. Some are within your control, but many are not. To cater for unexpected financial changes (loss of income, short term job loss, illness etc) most lenders include a buffer in their serviceability calculations to protect them (and you) from not being able to meet your repayment obligations when and if circumstances change. If you took out a home loan prior to November 2021, then your lender’s buffer would most likely have been 2.5%. As of November 2021, this buffer increased to 3%. This means that lenders assess your capacity to repay the loan if either interest rates were to rise or your income circumstances changed detrimentally.
That’s why MOST Australians have managed the 2022 interest rate rises, but we are now approaching more potential rate rises beyond the lenders’ buffer. So NOW is the time to be super careful of any unnecessary spending.
4. How do you manage your serviceability reputation? While you have a loan in place, it is very rare for a lender to question your serviceability unless they start to see regular defaults in your repayments. However, if you are a new borrower or seeking a new loan, your capacity to service is critical.
Here are some things you can consider that may have an impact to your serviceability and potential borrowing power.
Cut back on credit card limits or the number of credit cards you have
Pay down outstanding debt
Stop or cut down on unnecessary spending
Keep copies of your payslips, any bonuses and regular overtime. Record your income if you’re self employed to prove your actual pay.
Create and prove a regular savings pattern, build more equity or increase your savings in your offset account.
Be conscious of how much money you have remaining at the end of each pay, as this is where lenders will be looking in terms of your serviceability. The more you can show you have remaining, the more you can potentially borrow.
Above all, talk to your mortgage broker. They are best suited to help you review lenders’ products and offers. They can help identify a range of products to complement your individual situation and longer term property goals.
Don’t apply for any loan without speaking with us first.