If you’ve come across the term ‘serviceability’ on your quest to find your perfect home loan, you might be wondering what it really means. While lenders will take the amount of money you have for a deposit into account, they also consider how much you can afford to repay based on your entire financial situation.
If it sounds complicated, don’t worry – your broker is there to help answer your questions. The right information will give you a greater understanding of how this process works and the kind of buying power you can expect to enjoy before you even make a home loan application. In the meantime, here are some basics.
The loan serviceability basics
Lenders are obliged by law to undertake certain checks to confirm that lending you the amount of money you have applied for is not likely put you under financial hardship. From a business perspective, your lender will also want to ensure that they limit any risk of a borrower not being able to repay their loan in the short and long term. While each lender may assess your affordability differently, it generally involves them assessing whether your income will be able to meet your living expenses and enable you to meet your proposed loan repayments.
How is home loan serviceability calculated?
Your standard income less your regular liabilities and living expenses should leave enough for you to meet your new loan repayments. Remember, interest rates may move, so catering for an increase in rates and therefore repayment amounts is very important.
1) Your income
Lenders will generally consider your basic salary as well as overtime, company benefits, fully-maintained company cars, shift allowances, bonuses and commissions, and income from investments. They may incorporate all or only a certain percentage of income other than your salary, and, they might only consider income from a second job if you have held it for a certain minimum period of time.
Centrelink benefits may also be used in the calculation, but this may depend on the lenders’ policies.
Your broker will be able to provide you with more detailed information regarding what different lenders will accept.
2) Your liabilities and living expenses
Your income is always offset by your liabilities and living expenses, and, there are often many more than you may initially think of.
It can be beneficial to think about and list the different types of debt that you currently repay, such as credit cards, car finance, mobile phones, personal loans, HECS, and interest-free loans for furniture or whitegoods. Where you are able, reducing or clearing debts before making your loan application may be a good plan.
Next, consider your living expenses like food, clothing, utilities (e.g. electricity and gas), education (e.g. school fees), childcare, petrol, car insurance, gym memberships, or things that you regularly spend money on. Think about what expenses, if any, you might be willing and able to reduce before lodging your application.
Once you’ve organised your home loan, keep your future financially secure with an ALI Group Loan Protection Plan
. We provide coverage for a number of serious life events and help give you peace of mind. For more on our insurance, you can get in touch with one of our local ALI-authorised mortgage brokers
, or alternatively, request your loan protection quote
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