Everything you need to know about serviceability and qualifying for a home loan

What is mortgage serviceability?

Serviceability is a lender’s assessment of your ability to repay a mortgage or home loan. 

A lender needs to work out if you can afford to pay - or ‘service’, your home loan repayments,  a step designed to limit their exposure to risk. The serviceability criteria they set are to ensure you can afford the mortgage and to work out how much debt you can manage. A serviceability assessment typically occurs just before a lender runs a credit check on your loan application.

Different lenders, like dedicated home loan providers and banks, have their own serviceability criteria to assess your application. This means you may qualify for a home loan of varying amounts, depending on which lender assesses your application.

Lenders will generally be cautious when it comes to setting the maximum amount you can borrow. This is because the Australian Securities and Investments Commission (ASIC), who supervise the lending sector, has strict ‘duty of care’ standards to ensure that lenders are not providing loans to people who can’t afford to repay them.

Let’s now look at how lenders calculate your ability to service a home loan.

Calculating your serviceability 

Your serviceability is calculated based on four major elements, namely your:

1. After-tax monthly income
2. Living expenses or outgoings
3. Existing debt commitments 
4. New loan commitments (the home loan amount you are applying for)
   

Lenders calculate your serviceability by subtracting all your monthly expenses from your after-tax monthly income. This produces a figure known as net income surplus. Lenders will then calculate a net service ratio which equals net income surplus divided by the cost of your monthly debt commitments. Lenders will generally allow you to have a net service ratio of at least 1.00x to qualify for the loan.

Lenders also add a buffer into your home loan interest rate as part of their assessment, in case interest rates rise in the future. This varies depending on prevailing interest rates, but is currently around 2.5 per cent, which is added to a loan’s rate to assess your serviceability. This means if interest rates are at 2.5 per cent, you will be assessed on a rate of 5 per cent.

You can use our online calculator to work out how much you could borrow. This will give you an estimate of what type of property you can afford, how much your monthly repayments will be, and the term - or length - of the loan based on the interest rate. 

You may also want to know how you can improve your serviceability.

How can I improve my borrowing power or serviceability?

As we have seen your borrowing power or serviceability is a crucial aspect of qualifying for a home loan. If you want to make sure you maximise your borrowing capacity here are some ways you can do this:

• Minimise how much debt you have, particularly of unsecured debt like credit cards and personal loans.
• Make sure your financial affairs are in order, with no outstanding payments or tax debt.
• Find out your credit score or rating, which will give you a good idea how lenders will view you from a risk perspective.
• Save for the largest deposit you can, with a consistent record of savings. 
• Minimise your outgoings or expenses associated with your lifestyle.
  

If you have already saved for a deposit and are comfortable with your ability to service a home loan you can start the application process. 

Applying for your first home loan: Our 3 step process

Wondering how to apply for your first home loan? 

We have a simple, three step online application you can complete anytime, from any device.

Step 1
Tell us about yourself: Securely share your personal financial details. We verify your identity, credit history and financials online.

Step 2
Design your loan: Design the features of your loan to match what works best for you.

Step 3
Get approved! When all of your details check out, we provide you with the decision on your loan!

We then settle your loan and take care of the rest so you secure your dream home asap!

Armed with this knowledge you should now understand what it takes to qualify for a home loan. 

Have any questions about serviceability and qualifying for a home loan? We’re here to help, and our local team are available to chat at a time that suits your schedule.