Mastering Mortgage Serviceability
Mortgage serviceability can feel like a frustrating hurdle to clear, but it is an important safeguard against borrowing too much, particularly in the current interest rate landscape.
It’s in the best interests of all parties involved if your mortgage is chugging along with regular repayments being made. Borrowing an amount, you cannot repay can mean heartache for you, and can land your lender and broker in hot water. Enter mortgage serviceability.
Before approving your loan application, your lender will take a good look at your finances to see if you can meet repayments.
What Is Mortgage Serviceability?
Lenders and brokers have a duty of care to ensure you are not provided with a loan that is beyond your means. In fact, the National Consumer Credit Protection Act (2009) is in place to ensure lenders and brokers are following responsible lending practices.
Whilst this protects consumers from landing in financial dire straits, it means that lenders and brokers are serious about checking serviceability, which can create some strict hoops for you to jump through.
How Is Serviceability Calculated?
Your serviceability is calculated by looking at your income and subtracting your expenses and debt repayments (including your new home loan repayment amount). We then work out what portion of your monthly income can go towards repayments. This is called the debt service ratio. It is also important to calculate your debt-to-income ratio, which is a measurement used to compare your total debt to your gross household income. Your credit card limit will also be considered, and you may need to prove that you have the means to pay off the limit within three years, even if the balance is $0. Finally, a serviceability buffer is applied to the current interest rate to see if you will be able to continue repayments should the interest rate rise.
In 2021, the Australian Prudential Regulation Authority (APRA) raised the serviceability buffer from 2.5% to 3% This buffer amount has been the topic of much discussion, with some arguing it’s making it tough for people to pass the assessment and refinance to a low-rate loan. But APRA is remaining firm at 3% given the current state of interest rates.
How to Increase Your Serviceability
Here are our top tips for increasing your serviceability score and improving your chances of home loan approval:
- Pay down your debts to improve your debt-to-income ratio.
- Reduce your expenses by cutting out non-essentials and looking for better deals on utilities.
- Reduce your credit limits or cancel credit cards you are not using, if appropriate.
- Increase your income by starting a side hustle, asking for a raise, landing a higher-paying job or even a second one (if possible).
Other ways you can increase your chances of home loan approval:
- Improve your credit score. Lenders will delve into your credit history to see if you are good at making repayments.
- Look at spending habits. Lavish overspending on non-essentials could raise a lender’s eyebrows.
- Make savings. Showing that you can put away money on a regular basis will look good on your application.
Frequently Asked Questions
What is the importance of creating a budget?
Mortgage serviceability is a measure used by lenders and brokers to ensure that you can afford the loan you are applying for. It is calculated by subtracting your expenses and debt repayments from your income.
How can shopping around for better deals help me save money?
Serviceability is calculated by looking at your income and subtracting your expenses and debt repayments. The remaining amount is then divided by your monthly income to get the debt service ratio.
What should I do if I have multiple debts like a car loan and a personal loan?
The debt service ratio is the portion of your monthly income that can go towards repayments.
How can streamlining my superannuation accounts benefit me?
The debt-to-income ratio is a measurement used to compare your total debt to your gross household income.
What should I do with the money I save?
The serviceability buffer is an additional percentage applied to the current interest rate to see if you can continue making repayments should the interest rate rise. In 2021, APRA raised the serviceability buffer from 2.5% to 3%.
How Can I Improve My Serviceability?
You can improve your serviceability by paying down debts, reducing expenses, and increasing income. Other ways include improving your credit score and showing that you can save money regularly.
How Much Can You Safely Borrow?
Buying a home is an exciting prospect, but you don’t want to stretch yourself beyond your means. This is especially important given the recent RBA interest rate hikes over the year.
We are here to help you crunch the number and find a loan that will work for you, not against you. If you would like to find out your borrowing power and what loan options are available, give us a call.
Zippy Financial is an award-winning mortgage brokerage specialising in home loans, property investment, commercial lending, and vehicle & asset finance. Whether you are looking to buy your first home, refinance or build your property investment portfolio, the team at Zippy Financial can help find and secure the right loan for you and your business.
About the Author:
Louisa Sanghera is an award-winning mortgage broker and Director at Zippy Financial. Louisa founded Zippy Financial with the goal of helping clients grow their wealth through smart property and business financing. Louisa utilises her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients achieve their lifestyle and financial goals. Louisa is an experienced speaker, financial commentator, mortgage broker industry representative and small business advocate.
Louisa Sanghera is a Credit Representative (437236) of Mortgage Specialists Pty Ltd (Australian Credit Licence No. 387025).
Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether business, health or financial.