What is home loan serviceability and how is it calculated?

author-avatar By on June 25, 2020
What is home loan serviceability and how is it calculated?

Photo by Kelly Sikkema on Unsplash

If you’ve been thinking about buying a home, you’ve probably come across the term ‘loan serviceability’.

On this page:

How much money you can afford to borrow for a home loan depends on a few things, like the size of your deposit and the value of the property you want to buy.

Another factor lenders will consider when determining how much you can afford to borrow is your serviceability.

Serviceability generally refers to a borrower’s ability to repay a loan based on their income and expenses.

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers. 

Provider
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayment
 
Budget Home Loan OO P&I
2.68% 2.74% $1,618 More details
2.89% 2.89% $1,663 More details
2.39% 2.40% $1,558 More details
Economy Variable P&I 70%
2.69% 2.86% $1,620 More details

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 08 July 2020. View disclaimer.

What is loan serviceability?

Lenders are legally obligated to make sure that borrowers can afford to repay a loan under responsible lending rules.

The Australian Prudential Regulation Authority (APRA) keeps a watchful eye over financial institutions to make sure they are complying with responsible lending practices and 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 the picture.

‘Loan serviceability’ is essentially a calculation of your ability to meet your home loan repayments according to the size of the loan and your income and expenses.

Lenders have a few different methods of calculating your loan serviceability (we’ll talk more about this later), but all are required to add what’s known as a ‘buffer rate’ to the home loan interest rate they are offering after taking into account a borrowers' income and expenses.

This buffer essentially allows for the fact that interest rates can rise over a loan term, so the lender will want to ensure the borrower can still meet the repayments should interest rates rise.

Before July 2019, APRA required financial institutions to assess all borrowers against their capacity to repay a loan at 7% p.a. Given that interest rates are unlikely to return to those levels any time soon, this was amended - lenders now only have to add a 2.5% buffer on their current interest rates to review whether a borrower can afford to repay a loan if interest rates were to rise by this much.

How lenders calculate your loan serviceability

Many lenders calculate a borrower’s serviceability by adding up all their income, then deducting any outstanding debt they may have, as well as other expenses AND their monthly loan repayment with the buffer built into their calculations.

What counts as income?

When calculating your serviceability, many lenders will consider the income you have from your regular salary and wages, as well as alternative sources including rental income, investments and benefits.

But not all income is treated equally. Because rental and investment income can fluctuate, many lenders will only take into account about 80% of this income or less.

Methods of calculating serviceability

There tend to be three different methods banks use when calculating your serviceability which includes:

Debt Servicing Ratio (DSR): This method calculates the borrower’s monthly expenses as a percentage of monthly income. Most lenders use a maximum DSR of between 30-35%.

Net Surplus Ratio (NSR): This method is the opposite of the DSR method and calculates the amount of money that’s left after all expenses have been paid.

Uncommitted monthly income (UMI): This method calculates the amount you will have left each month after all expenses (including mortgage repayments) have been taken away from your before-tax (gross) income.

Generally, most banks won’t make which method they use publicly available knowledge, which means you may get different serviceability calculations depending on which lender you go with.

How to improve your loan serviceability

If you want to improve your loan serviceability, you can either increase your income or decrease your expenses.

You could increase your income by asking your employer for a pay rise or a bonus, or by taking on a second job. You may want to consider making money by driving for Uber or completing tasks on Airtasker.

Decreasing your expenses is arguably the easier of the two as it is completely within your control to do so, whereas increasing your income isn’t always an option for some.

You could start by getting rid of any outstanding debts, particularly credit card debt which will significantly eat into your borrowing power. It’s also wise to clear any buy now, pay later debt.

Savings.com.au’s two cents

If you want to stand the best possible chance of being approved for a home loan, it’s important to understand what loan serviceability is and ways you could improve your own serviceability.

In trying economic conditions, it can be even more important to prove your high serviceability capacity to lenders.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

Latest Articles

author-avatar
Emma joined Savings.com.au as a Finance Journalist in 2019. She is a journalist with more than five years experience across print, broadcast and digital media, with previous stints at Style Magazines, 4ZZZ radio, and as editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of young women and millennials by writing about complex financial topics in a way that's easy for the average Joe (or Jill) to understand. When she's not writing about finance she's watching Greys Anatomy (again).

Collections:

Get free insights & tips monthly

By subscribing you agree to the Savings Privacy Policy

Loading data please wait...

{{returnData.productName}}

Overview

Current Rate

{{returnData.currentRate | percentage:2}}

Comparison Rate*

{{returnData.comparisonRate | percentage:2}}

Rate Type

{{returnData.rateType}}

Advertised Rate

{{returnData.advertisedInterestRate}}

Comparison Rate*

{{returnData.comparisonRate}}

Monthly Repayment

{{returnData.monthlyRepayment}}

Interest Type

{{returnData.interestType}}

Total Interest Rate

{{returnData.totalInterestRate | percentage:2}}

Base Interest Rate

{{returnData.baseInterestRate | percentage:2}}

Bonus Interest Rate

{{returnData.bonusInterestRate | percentage:2}}

Total Interest Rate

{{returnData.totalInterestRate | percentage:2}}

Introductory Rate

{{returnData.introductoryRate | percentage:2}}

Introductory Term

{{returnData.introductoryTerm}}

Base Interest Rate

{{returnData.baseInterestRate | percentage:2}}

Term

{{returnData.term}}

Advertised Interest Rate

{{returnData.advertisedInterestRate | percentage:2}}

Interest Frequency

{{returnData.interestFrequency}}


Fees and Features

Ongoing Annualised Fee

{{returnData.annualFee}}

Upfront Fee

{{returnData.upfrontFee}}

Offset Account

Redraw

Principal & Interest

Interest Only

N/A{{returnData.interestOnly}}

Max loan to value ratio (LVR)

{{returnData.maxLVR | percentage:0}}

Lump sum repayments

N/A

Additional repayments

Maximum Loan Term

{{returnData.maximumLoanTerm}}

Upfront Fee

${{returnData.upfrontFee}}

Ongoing Monthly Fee

{{returnData.ongoingFees}}

Early Repayment Fee Applies

N/A

Vehicle Types

{{returnData.vehicleType}}

Maximum Vehicle Age

{{returnData.maximumVehicleAge}}

Pre Approval Available

N/A

Online Application

N/A

Account Keeping Fee

{{returnData.accountKeepingFee}}

Minimum Monthly Deposit

{{returnData.minMonthlyDeposit}}

Linked Account Required

N/A

Interest Calculated

{{returnData.interestCalculated}}

Interest Paid

{{returnData.interestPaid}}

Online Application

N/A

ATM

N/A

EFTPOS

N/A

Account Keeping Fee

{{returnData.accountKeepingFee}}

Minimum Monthly Deposit

{{returnData.minMonthlyDeposit}}

Linked Account Required

N/A

Interest Calculated

{{returnData.interestCalculated}}

Interest Paid

{{returnData.interestPaid}}

Online Application

N/A

ATM

N/A

EFTPOS

N/A

Minimum Deposit

{{returnData.minDeposit | currency : '$' : 0}}

Upfront Fees

{{returnData.upfrontFee | currency : '$' : 0}}

Annual Fees

{{returnData.annualFee | currency : '$' : 0}}

Notice Period to Withdraw

{{returnData.noticePeriodToWithdraw}}

Online Application

N/A

Automatic Rollover

N/A

Maturity Alert

N/A