As a borrower, lenders carefully evaluate your serviceability when considering your loan application or pre-approval for a home loan. In this article, we aim to address the most common questions regarding serviceability and its relevance to you as a borrower.
What is Serviceability?
Serviceability refers to a borrower’s ability to repay their home loan regularly. Lenders determine a borrower’s serviceability by examining various factors such as income, expenses, and other financial considerations. The outcome of this assessment determines the borrower’s capacity to handle the proposed loan amount based on their financial situation.
As part of the evaluation process, lenders calculate the borrower’s debt-service ratio, which measures the proportion of their monthly income allocated towards servicing existing debts. A higher DSR percentage is generally considered favourable as it indicates to lenders that the borrower is in a solid position to manage loan repayments.
How Do Lenders Calculate Loan Serviceability?
Lenders employ various methods to calculate a borrower’s serviceability, considering their income, outstanding debts, expenses, and the repayment buffer. Here’s an overview of how lenders typically perform these calculations:
Income Consideration
Lenders consider different income sources when assessing serviceability. This includes regular salary and wages and alternative sources such as rental income, investments, and benefits. However, not all income is treated equally. Due to the potential rental and investment income fluctuations, lenders often consider only around 80% or less of these amounts.
Methods of Calculating Serviceability
Lenders typically employ three main methods to calculate serviceability:
- Debt Servicing Ratio: This method evaluates the borrower's monthly expenses as a percentage of their monthly income. Most lenders use a maximum DSR ranging from 30% to 35%.
- Net Surplus Ratio: Unlike the DSR method, the NSR calculates the amount of money remaining after deducting all expenses.
- Uncommitted monthly income: This method calculates the surplus amount remaining each month after deducting expenses, including mortgage repayments, from the borrower's before-tax income.
Variation Among Lenders
Different lenders may utilize distinct serviceability calculation methods but usually don’t disclose this information publicly. Consequently, you may receive varying serviceability assessments when approaching other lenders depending on their specific calculation methodologies.
Income Classification and Assessment
Income encompasses various earnings that contribute to your overall financial resources and is a significant factor in serviceability calculations. Here’s an overview of the types of income that lenders typically consider:
Salary and Employment Income
Your regular salary or wages from employment form a crucial part of your income assessment. This includes your base salary, any fixed allowances, and other regular payments related to your employment.
Property Rental Income
If you receive income from renting out a property you own, lenders will consider this rental income. However, it’s important to note that typically only 80% of the gross rental income is thought to account for operating costs and potential fluctuations in rental income.
Overtime Payments
For certain occupations where overtime is a typical income component, such as nursing, policing, or firefighting, lenders often consider the total amount of overtime income for serviceability calculations. However, for other professions where overtime income is less consistent, only a portion of the overtime earnings may be factored into the income calculation.
Centrelink Benefits
Certain Centrelink benefits, including Family Tax Benefits Parts A and B, can be considered part of your income for serviceability assessments. Lenders take these benefits into account when evaluating your overall financial situation.
Commissions and Additional Income Sources
Lenders may consider this income if you earn commissions or have additional income from sources like freelancing or second jobs. However, the assessment may vary based on factors such as the duration of your field involvement and the income source’s stability.
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