Serviceability for Home Loans

What is serviceability?

Serviceability is evidence of your affordability for taking a home loan.

It is essentially a test of your ability to service a home loan using your income and liability position. Lenders will take into consideration your income from various sources, and likewise take into consideration commitment and liabilities known at the time of application. Our borrowing power calculator is a useful tool to determine your borrowing capacity.

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Types of serviceability

Different lenders assess serviceability differently using different methodology approaches. In Australia, most lenders use either or a combination of the below rules for determining serviceability. These can include:

  • Debt Service Ratio (DSR): The amount of income required or used to service debts.
  • Uncommitted Monthly Income: Surplus income left over after subtracting stress tested commitment or repayment.
  • Interest Cover Ratio or Net Surplus Ratio: The Amount of left over income equal to the amount required to pay off the interest on a loan. Lenders usually require 1: 1 or in some cases slightly higher ratios up 1 : 1.25.

Additionally, different lenders can use different calculators which change borrowing capacity even though they use the same methodology.

It’s best to speak with one of our brokers who can guide you through the maze and requirements between lenders and their policies.

Income used to determine servicing

The income sources and supporting documents used to determine servicing are listed below:

1. Payslips from PAYG Income

  • Base Salary
  • Bonus
  • Commissions
  • Overtime

2. Rental Income

  • Residential Property
  • Commercial Property

3. Tax Free Government support income

  • Family Tax Benefit Part A
  • Family Tax benefit Part B
  • Child Support

4. Negative Gearing

  • Used to assess the benefit to the applicant and can increase their borrowing capacity when factored into servicing

5. Tax returns from Self Employed income

6. Dividends

7. Company Profits

8. Addbacks

  • Depreciation
  • Interest
  • Non Recurring Expenses
  • Non Continuing Rental Expense

Loan types in servicing

Most loans or liabilities are expensed when doing serviceability. These could include loans held with other financial institutions NOT being refinanced in the current application. However, there are some case when loans in another entity name are not expensed in the loan assessment or serviceability process. These include loans in the name of

  • Other company
  • Trust name
  • SMSF loans

A small number of lenders take a limited recourse view of loans in other entities and do not factor the entities loans in assessment when determining group serviceability. This allows you to borrow more with the chosen lender and increases your buying potential.

Servicing using residential home loans or commercial loans can change the buffering and approach used between these types of loans.

Our brokers can guide you through this and help you increase your borrowing capacity.

Buffers in a serviceability assessment

Most lenders use a buffer when assessing servicing on a home loan. This is a loading of the interest rate during the servicing test phase to ensure of affordability based on a rate increase. For example, if you were taking a home loan at say 3%, then most lenders will assess this loan for you at 2.5% above the rate you are being offered. Hence your loan will be assessed at 5.5% to ensure you can afford your home loan repayment at a higher rate in case of rate movement upwards. This higher rate during servicing assessment is also known as the floor rate or plug rate.

Our brokers are very experienced in reading, translating and analysing income and liabilities onto a serviceability worksheet. If you want to pass serviceability, speak with one of our team members directly and they can get you through the whole process.