‘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.
Essentially, they’re judging your ability to repay the loan. When they’re lending hundreds of thousands of dollars, they want to be sure that they’re going to get it back. So how do they assess your home loan serviceability.
How to calculate your home loan serviceability
The main factors that will affect your ability to make home loan repayments are:
- your income
- your expenses
- the amount of debt you have
For example, suppose you and your partner have a monthly net income of $10,000 and you spend $5000 a month, that leaves $5000 free. Now, if you’re applying for a loan that requires you to pay back $5000 a month, you can see why a lender may have concerns. Any change in spending, any unexpected bills, and the ability to repay the mortgage comes into question.
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.
Factors like debt owed or owning a credit card also impact your ability to borrow. Even if the balance on your credit card is $0, just having access to credit will impact how much someone is prepared to lend you.
How can you improve your home loan serviceability ratio?
There are five main ways to improve (lower) your serviceability ratio:
1) increase your income,
2) reduce your debt (eg 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 (eg by coming up with a higher deposit or buying a cheaper property)
5) reduce how much you spend for at least three months prior to applying for a loan.
Will my serviceability ratio improve over time?
As your home loan debt decreases, your ratio improves. It will also increase as your income increases over time or you eliminate other debts. When either or both of these things happen, it gives you the opportunity to borrow for an investment property to increase your wealth.
However, if your income stays the same, you get a credit card or two, and start eating out more often, then your ratio will decrease.
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.
