What is home loan serviceability and how is it calculated?
- Mortgage serviceability testing determines how much a person can borrow, with lenders considering a borrower's income, expenses, existing debts, deposit, and the interest rate they're applying for.
- Each lender calculates serviceability differently, meaning your borrowing power can vary between banks.
- APRA’s serviceability buffer can also shape outcomes, with banks required to test whether you could afford repayments at higher rates.
How much money you can borrow through a home loan varies on a few things: Your income and outgoings, the size of your deposit, and the interest rate on the mortgage product you're applying for, to name a few. These are all things a lender might consider when testing your home loan serviceability, or to put it differently, how much debt you're deemed able to service.
Understandably, your serviceability and your bank or lender's serviceability testing plays a crucial role in the home loan approval process. But not all lenders' serviceability tests are made equal.
What is home loan serviceability testing?
Lenders are legally obligated to make sure borrowers can afford to repay loans given to them under responsible lending rules set by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).
APRA and ASIC keep a watchful eyes on financial institutions to make sure they're complying with responsible lending practices by putting checks and balances in place to ensure people aren't jumping into massive home loans they can't afford.
This is where loan serviceability comes into play.
- Loan serviceability is essentially a calculation of your ability to meet your home loan repayments based on the size of the loan, your income and expenses, your existing debts and credit limits, and the interest rate you're being offered.
Lenders have a few different methods of calculating your loan serviceability and, for this reason, one financial institution might determine your borrowing power is higher or lower than another. Though, applying for a home loan from multiple lenders at once can have a damaging impact on your credit score.
The way banks think about that is they look at income and they look at all of your debt and commitment, and they apply various benchmarks to those to factor in good times and bad and ultimately work out how much you can borrow.
What that really means for individual borrowers is really a range, because it's different bank to bank.
Ultimately, when you're going through either the refinance process or purchase process it's a key part of the process in terms of where you focus your efforts and what you're eligible for.
Why is home loan serviceability important?
Home loan serviceability tests ultimately determine your borrowing power. That is, the amount a bank or lender is willing to lend to you. Of course, that has major flow on effects for the property you might be able to buy.
Any shortfall between your borrowing power and your ideal property's price needs to be addressed by your deposit. If your deposit doesn't span the gap, it's likely that you simply can't afford the property.
What is the APRA serviceability buffer?
What's a deep dive on mortgage serviceability testing with the APRA serviceability buffer? It's a buffer that authorised deposit-taking institutions (ADIs) - also known as banks - must apply to the interest rate on the table for a particular borrower. This ensures said borrower could theoretically continue meeting their home loan repayments if interest rates were to rise.
At the time of writing, the serviceability buffer is 3%, meaning if a bank offers a mortgage rate of 5.5% p.a., it must assess whether an applicant could still afford repayments if their interest rate rose to 8.5% p.a. (5.5% + 3%).
A key point to note about the serviceability buffer is that it only applies to banks. Non-bank lenders don't need to abide by APRA's rules, but most still implement their own serviceability buffer to protect both themselves and borrowers.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
How lenders calculate your loan serviceability
Many lenders calculate a borrower's serviceability by:
Adding up all sources of income including wages, rental income, and income from investments.
But not all income is treated equally. Because rental and investment income can fluctuate, many lenders only consider 80% or less of these income streams.- Do lenders count overtime or bonuses when assessing income?
Most lenders do count overtime, bonuses, commissions, or allowance‑based income, but generally only if it’s regular and likely to be ongoing as they'll want to see that the income is stable enough to rely on for mortgage repayments. In many cases, a lender will only include a portion of this 'extra' income - often around 80% - to account for fluctuations, but if you work in an industry where overtime or allowances are standard - such as emergency services or healthcare - some lenders may accept 100% of that income.
- Do lenders count overtime or bonuses when assessing income?
Assessing outstanding debts like personal loans, credit card balances, and even buy now, pay later (BNPL) limits.
Accounting for living expenses, including groceries, utilities, ongoing costs like childcare and school fees, and discretionary spending.
Factoring in the expected loan repayment at the interest rate offered plus any serviceability buffer
Common methods of calculating serviceability
There are many methods lenders may use to assess serviceability. Generally, most banks won't publicly disclose which method they use, and some may use multiple, which means you may get different serviceability calculations depending on which lender you go with.
Three common equations used to assess whether a home loan is affordable are:
1. Debt-to-Income Ratio (DTI)
DTI = Total Debt ÷ Gross Annual Income
Most lenders prefer a DTI below 6, meaning your total debt should not exceed six times your annual income.
APRA imposed limits on ADIs in 2026 restricting loans with DTIs of six times or more to 20% of new loans written by a bank. This could further discourage lenders from committing to higher DTI loans.
2. Net Surplus Ratio (NSR)
NSR = (Income - Expenses) ÷ Income
This measures the percentage of income left over after all expenses are deducted. A higher NSR may mean better serviceability.
3. Uncommitted Monthly Income (UMI)
UMI = Monthly Income - Monthly Expenses (including loan repayments)
This method calculates how much cash a person is left with each month after all their obligations are met.
How can you improve your home loan serviceability?
Fortunately, there are a number of ways your can bolster your performance in home loan serviceability tests, and therefore increase your borrowing power. Here are a few ways you may be able to tidy up your finances in the eyes of a lender:
1. Reduce existing debt
- Pay down credit cards, personal loans and buy now, pay later (BNPL) debt before applying for a home loan.
- Close unused credit cards - lenders consider your total credit limit, not just your balance.
- Lower your credit card limit - a $20,000 limit can reduce borrowing power significantly.
Lenders will take into account your existing loan repayments when assessing your borrowing capacity. Moreover, they'll generally consider potential debt you have access to (such as credit card limits and BNPL accounts) to be fully drawn, since they could be drawn down upon at the tap of a card or click of a button.
"Just reducing your overall credit card limit by $10,000 or $20,000 can have a massive impact on your borrowing power," Mr Hyman said.
2. Cut back on spending
- Reduce discretionary spending on dining out, streaming services, and entertainment.
- Track expenses to identify areas where you can save.
Lenders assess spending habits over time to ensure borrowers aren't overextending themselves financially. Cutting back on non-essential purchases may improve your borrowing power and help you save more towards a deposit - a win-win!
3. Budget as if you already have a mortgage
- Live as if you're already making mortgage repayments.
- Set aside hypothetical mortgage repayments in a savings account to prove financial discipline.
Mr Hyman suggests doing this at least six months before applying.
"It builds good financial habits and lowers your expense base, making you look better to lenders."
4. Improve your credit score
- Check your credit report and correct any errors.
- Make existing loan repayments on time to avoid marks on your report.
- Avoid payday loans as lenders often view them as red flags.
5. Increase your income
- Negotiate a salary raise or take on additional work.
- Consider a second income stream like freelancing, part-time, or casual work.
Mr Hyman said increasing your income is a viable way of improving your serviceability, but for obvious reasons is one of the less viable ways.
"There's a couple of obvious ways to improve your serviceability, increasing your income is one way but of course that's not always easy to achieve," he said.
How does HECS-HELP debt impact mortgage serviceability?
While HECS‑HELP debt doesn’t affect your credit score and isn’t treated like a typical loan, it can impact how much you can borrow. That’s because lenders factor HECS-HELP repayments into your serviceability assessment when determining if you can afford a home loan.
Lenders tend to treat an applicant's compulsory HECS-HELP repayment (a percentage of their income) as an ongoing commitment, much like tax or superannuation. That's because it reduces your take‑home pay, which in turn reduces the income left over to service a mortgage.
However, APRA loosened the reigns on banks assessing a borrower's ability to service a loan if they're expected to repay their HECS-HELP debt in the near term in 2025.
In response to APRA’s inquiries about how HECS should be treated in lending assessments, two major banks announced changes:
- CommBank announced it will disregard an applicant's HECS debt if they're expected to pay it off within 12 months
- NAB announced it will disregard HECS debts of less than $20,000
Other banks likely also changes their approach to HECS-HELP debts in mortgage serviceability tests in the wake of APRA's easing, though mightn't have publicly revealed their new stance.
Remember: Improving your serviceability takes time
Even if you did all the above today, chances are it would take some time for the flow-on effects to be measurable.
Moreover, lenders generally prefer established financial habits over short-term financial fixes, and many will want to see genuine savings habits before approving a significant loan.
"If you're wanting to reduce your expenses and use that as a way to drive your serviceability up, that can be done and demonstrated in a six month period while you're still either saving for that deposit for the first time, or if you're building up extra equity," Mr Hyman said.
"Reducing things like credit card limits, those things can happen relatively immediately. So if you're sitting there with a $35,000 credit limit, and you only ever use five or ten grand at a time, calling the bank and cutting that down from $35,000 to $10,000, that can happen on the same day."