What is serviceability?

While shopping for a home loan, you’ll encounter the term “serviceability” a lot. But what is it and how does it affect your chances of getting a loan? 

As a borrower, lenders look at your serviceability when assessing you for a loan or a home loan pre-approval. In this article, we answer all the frequently asked questions about serviceability and how they relate to you as a borrower. 

What is serviceability? 

Serviceability is a borrower’s ability to make repayments on their home loan. Lenders calculate a borrower’s serviceability by looking at their income, expenses, and other factors. Your serviceability result will depend on the size of your proposed loan and your financial situation. 

The lender will then assess your debt-service ratio (DSR), which measures how much your monthly income goes towards servicing your debt. A higher DSR percentage is better as it shows lenders that you’re in a good position to cover payments on your loan.  

The ideal DSR changes depending on the lender, however, those with higher DSR are more likely to get approved for a loan. 

How does a lender calculate serviceability? 

Lenders such as loans.com.au consider the following factors when calculating serviceability: 

• Income 
• Expenses 
• Debt 
• Proposed monthly mortgage payment 

At loans.com.au, we consider your debt-to-income ratio to see if you’re able to pay off your monthly repayments. The debt-to-income ratio is your monthly debt payments divided by your gross monthly income. A lower debt-to-income ratio is preferred by lenders. 

Meanwhile, serviceability is calculated by adding up your income from all sources, subtracting your expenses and debts, and then adding on your proposed monthly mortgage payment to see if you have enough to pay plus some left over if rates go up. 

How do lenders assess serviceability? 

When calculating serviceability, lenders like loans.com.au will assess your ability to repay your home loan based on an adjusted interest rate. We add a margin to the variable interest rate to properly calculate your “assessment rate”.  

A margin is added to the calculations because interest rates could rise in the future, and lenders need to know that you could afford to meet repayments if they were higher. 

What is classified as income and how is it assessed? 

Income can include your salary, overtime payments, bonuses, and sales commissions. It can also include fringe benefits such as a company car or expense account. All these will be considered when calculating your serviceability. 

Types of income 

Lenders consider various types of income such as: 

• Salary and employment income 
• Property rental income   
• Overtime payments   
• Centrelink benefits (including Family Tax Benefits Parts A and B)   
• Commissions   

Keep in mind that not all types of income are considered equally or in full. For instance, rental income for a standard single residential tenancy will generally only have 80% of the gross income considered toward serviceability. It’s not considered in full because operating costs and rental income fluctuations are taken into consideration. 

In some jobs like nursing, policing, and firefighting, overtime is a key part of your income and will be considered in full for serviceability calculations by most lenders. For other jobs, where overtime is less reliable, only a portion of your overtime income may be used to calculate your income. 

Limitations are applied to income from second jobs, as well. Money earned from commissions or freelancing may be considered if you’ve been in the field for a significant time. 

What are liabilities? 

Liabilities relate to existing debts including home loans, credit cards, personal or investment loans, car loans, and HELP debt. Expenses such as rent and child maintenance payments also count as liabilities. 

You’ll have to provide an account statement for your debts to confirm your monthly repayments. When it comes to credit card debt, lenders will consider the interest payments you’ll be liable for if you draw down the available limit. Similarly, a line of credit will be considered as if it were fully drawn down, even if it isn’t.  

How can you improve your serviceability? 

For a better chance at loan approval or home loan pre-approval, you need to have a good DSR. The lender will ultimately have the final say on how much you’re allowed to borrow. However, there are still ways for you to improve your position and lead with your best effort. 

Improve your serviceability with these helpful tips: 

• Lower your debt-to-income ratio – Increase your income by getting a better paying job or finding additional ways to generate income. Or find a way to reduce your expenses by living more frugally or paying off debt as soon as possible. 
• Reduce your credit limit – One step you can take to increase the amount you can borrow is to reduce your credit limit(s) to the lowest amount possible and cancel unused cards. 
• Have smarter spending habits – Lenders will inspect your spending habits at least three months prior to your loan application. Showing responsible spending over a long period gives lenders confidence that you’re in control of your finances. 

See your borrowing power using our handy borrowing capacity calculator. Using this calculator, you can estimate how much you’ll be able to borrow in your current financial situation. This can help guide you as you work towards your goal. 

What is the Household Expenditure Measure (HEM)? 

The HEM is a benchmark that many lenders, including loans.com.au, use to estimate a borrower’s annual living expenses.  For lenders, this is a vital step to figuring out how much you can afford to borrow. 

This tool considers how much you may spend on necessities (e.g., food, utilities, transportation, and clothing) and voluntary or discretionary purchases (e.g., alcohol, eating out, and childcare).  

Luxury expenses, such as overseas holidays, are excluded from calculations because you could easily cut them out if you have to. Rent or mortgage payments are also not included in the HEM because they will be replaced when you buy a home. 

What types of living expenses will be considered in your home loan application? 

Living expenses that you will be required to estimate when you apply for a loan with loans.com.au include:  

• Education 
• Childcare 
• Private health coverage 
• General living expenses such as groceries, utilities, transportation, and insurance 

Need to know more about serviceability? 

Get in touch with us at loans.com.au! Our friendly lending specialist will be more than happy to answer your queries. Call 1300 471 786 or book an appointment with a lending specialist.

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