‘Serviceability’ is home loan jargon for your ability to make (‘service’) your home loan repayments. When you apply for a home loan, your lender will calculate your serviceability ratio.
Factors that affect home loan serviceability
The main factors that will affect your ability to make home loan repayments are:
- your income, and
- the amount of debt repayments you have. (This includes your potential home loan repayments and any credit card limits you currently have).
For example, supposeyou and your partner have a monthly net income of $10,000 and your monthly debt repayments (including your home loan) will be $2,500. Your serviceability ratio is 25% ($10,000 divided by $2,500).
Lenders will have a maximum serviceability ratio that they are prepared to accept. Some will not be prepared to approve your application if your serviceability ratio is higher than 30%. Others will be prepared to accept up to 35%. The higher the ratio, the more risk to the lender.
Lenders who accept higher serviceability ratios often have higher interest rates.
It was recently announced that lenders should factor in an interest rate 3% higher than current market interest rates when calculating serviceability ratios. This helps to protect borrowers from financial hardship if interest rates rise. It gives you a financial buffer.
How can you improve your home loan serviceability ratio?
There are four main ways to improve (lower) your serviceability ratio:
1) increase your income,
2) reduce your debt (e.g. pay off your credit cards or personal loans before you apply for your home loan),
3) get rid of your credit cards (or reduce your credit limits), and
4) borrow less for your home loan (e.g. by coming up with a higher deposit or buying a cheaper property).
Will my serviceability ratio improve over time?
It will as your home loan debt decreases. It will also increase as your income increases over time (e.g. if you get a promotion). When either or both of these things happen, it gives you the opportunity to borrow for an investment property to increase your wealth.
How much can I borrow for a home loan?
This will depend on your individual financial circumstances. It also depends on the maximum serviceability ratio of the lender you choose. You can use our Wisebuy calculator to give you an idea.
Use current interest rates to work out your repayments. Then add 3% for the loan serviceability buffer your lender will use.
As long as that higher repayment amount falls within the lender’s maximum ratio, you should get your loan approved.
How we can help
If you’re looking to buy a home, our licensed and experienced brokers at Wisebuy Investment Group can help you find the right loan for your needs. They can also help you with your loan application.
We service a diverse range of clients in the popular Newcastle, Lake Macquarie and Maitland areas. We also work with more than 60 lenders in the Australian market.
Contact us today for an obligation-free chat. We’d be happy to answer any questions you have.