What is home loan serviceability? (And how to increase yours)
In home loan terms, “serviceability” is your capability to afford loan repayments based on your financial situation.
This will affect many things, including your borrowing power, loan application approval, and final loan amount.
Before going to your lender, learn what serviceability is and how it can help when applying for a home loan.
What is home loan serviceability?
When you apply for a home loan in Australia, your lender has various ways to determine how much money you can realistically borrow from them while still making repayments comfortably.
One measure they use is called "serviceability" — the amount of monthly repayments you can afford to pay each month on your home loan.
How is home loan serviceability calculated?
Lenders usually take a look at your income, expenses, debt, credit history, and other factors to get a complete picture of your financial situation.
But bear in mind that different lenders and financial institutions have various serviceability calculations, and they won't reveal their exact method of deriving the final figure.
So, don't be surprised if one lender determines that you'll be able to borrow more from them than the next.
Get an idea of how much you can borrow with our borrowing power calculator.
Your serviceability will also help them to calculate your debt service ratio (DSR) — a percentage that tells you how much of your monthly income will go towards paying off your home loan repayments.
As a side note, banks usually try to give a conservative figure when it comes to determining your serviceability. This is because, in addition to your personal circumstances, they have to factor in fluctuations in loan interest rates.
The Australian Prudential Regulation Authority (APRA) has rules in place to ensure that lenders do not approve loans that borrowers won't be able to afford.
What are the factors that affect home loan serviceability?
The big factors that influence your serviceability include:
- Income
- Expenses
- Debts
Income
Your lender will take a look at all of your income sources. This includes:
- Salary or earnings from self-employment
- Rental income from investment property
- Other sources of money you might have coming in, like bonuses or other investments
Note that income isn't always as straightforward to calculate. Income from inconsistent sources (like gig work or rental property earnings) might not be given full weight as they may fluctuate over a period of time.
The lender will also take into account any long period of leave from employment- paid or unpaid - such as parental leave.
Expenses
Your lender will also subtract your monthly expenses from your income. This includes things like:
- Daily living expenses (e.g. groceries, transportation costs, and entertainment)
- Number of dependents you have
Debt liabilities
Additionally, your lender will look at any debt liabilities you may have, like credit card debts or car loans.
Finally, they'll add in the monthly mortgage repayment that you'll be responsible for. With all of that information, the bank can determine how much you can comfortably afford to borrow.
How can I improve my home loan serviceability?
Here are a few tips on how to increase your serviceability and borrowing capacity:
1. Increase your total income
- Increase employment income via a raise or additional job.
- Consider investing in other assets that can give you another source of income.
2. Minimise your expenses
- Cut down on non-essential expenses in entertainment and subscription services.
- Set a budget for fixed and variable expenses so you can demonstrate financial discipline.
3. Lower your existing debts
- Reduce your credit card limits and personal loans, and aim for fewer lines of credit.
- Explore methods of increasing your credit score, such as paying bills on time and maintaining a low balance on any existing accounts.
The lowdown: Increase your serviceability and borrowing capacity
Your serviceability is about how well you can meet monthly home loan repayment.
It's an important metric calculated by your lender, which determines how much they'll be able to lend you. It can also help you to make informed financial decisions when it comes to purchasing a home.
The good news is that you have some control over your serviceability. In the most basic terms, you want to increase income and reduce expenses along with debt to reach your best level of serviceability.
This will help you to be in the best position to afford your dream home!
