What Is a Serviceability Assessment?
When you apply for a home loan, lenders need to make sure you can comfortably afford the repayments. This process is called a serviceability assessment, and it's one of the most important steps in your home loan application.
Think of it as a financial health check. Lenders examine your income, expenses, debts, and lifestyle to calculate whether you can manage your mortgage repayments - not just now, but if circumstances change. For first home buyers in NSW, understanding this assessment can make the difference between approval and rejection.
How Do Lenders Calculate Serviceability?
Lenders use a specific formula to work out your borrowing capacity. They'll look at several key factors:
Your Income
- Employment income (salary, wages, commissions)
- Rental income from investment properties
- Self-employment income (usually averaged over two years)
- Government benefits and allowances
- Other regular income sources
Your Expenses
- Existing loan repayments (credit cards, personal loans, car loans)
- Living expenses based on the Household Expenditure Measure (HEM)
- Financial dependants
- Other regular commitments
Lenders also apply a buffer to the current home loan rates when calculating home loan repayments. This means they'll assess your ability to pay at a higher interest rate than what you'll actually be charged - typically around 3% above the loan's interest rate. This buffer protects both you and the lender if interest rates rise.
What Affects Your Serviceability?
Several factors can improve or reduce your borrowing capacity:
Credit Card Limits
Even if you pay off your credit card every month, lenders assess serviceability based on the card's limit, not what you owe. A credit card with a $10,000 limit could reduce your borrowing capacity by $50,000 or more. Consider closing unused cards or reducing limits before you apply for a home loan.
Buy Now Pay Later Services
Afterpay, Zip Pay, and similar services are treated as credit facilities. Multiple BNPL accounts can impact your serviceability, so it's worth consolidating or closing accounts you don't need.
Living Expenses
Lenders will compare your declared expenses against the HEM benchmark. If your spending is significantly higher than average, they'll use the higher figure when calculating home loan repayments.
Employment Type
Permanent employees often find it easier to demonstrate stable income. Casual workers, contractors, and self-employed applicants may need additional documentation to prove income consistency, which can affect their borrowing capacity.
Tips to Improve Your Serviceability
Want to improve your chances of approval? Here's what you can do:
-
Review your spending: Track your expenses for a few months and identify areas where you can cut back. Reducing discretionary spending shows lenders you can manage money responsibly.
-
Reduce debt: Pay down credit cards, personal loans, and other debts. Even small reductions can significantly improve borrowing capacity.
-
Lower credit limits: Contact your credit card providers and reduce limits on cards you're keeping. Close accounts you don't use.
-
Build your savings: A larger deposit reduces the loan amount you need and may help you avoid Lenders Mortgage Insurance (LMI), which can save thousands of dollars.
-
Maintain steady employment: Lenders prefer to see at least 3-6 months in your current role. If you're planning a job change, consider waiting until after your home loan settles.
-
Check your credit report: Ensure there are no errors that could affect your application. Multiple credit enquiries can raise red flags, so avoid applying for new credit before your home loan application.
Understanding Different Home Loan Products
The type of home loan you choose can also affect serviceability:
Principal and Interest vs Interest Only
Principal and interest loans require higher repayments but help you build equity faster. Interest only loans have lower initial repayments but don't reduce your loan amount during the interest only period.
Variable Rate vs Fixed Rate
A variable rate home loan means your interest rate and repayments can change. A fixed interest rate home loan locks in your rate for a set period, giving you certainty. A split loan combines both features, letting you access the benefits of each option.
Offset Accounts
An offset account is a transaction account linked to your owner occupied home loan. The balance in your linked offset account reduces the interest charged on your loan, helping you save money and build equity faster while maintaining access to your funds.
Getting Pre-Approval
Home loan pre-approval is a conditional agreement from a lender showing how much they're willing to lend you. It's based on a preliminary serviceability assessment and gives you confidence when searching for property.
Pre-approval typically lasts 3-6 months and helps you:
- Understand your borrowing capacity
- Set a realistic property budget
- Show sellers you're a serious buyer
- Compare rates and home loan features across different lenders
How FHOG Can Help
Serviceability assessments can be complex, especially for first home buyers who are navigating the process for the first time. At FHOG, we work with you to understand your financial situation and access home loan options from banks and lenders across Australia.
We can help you:
- Calculate realistic borrowing capacity
- Identify ways to improve your serviceability
- Compare rates and home loan packages from multiple lenders
- Find home loan products suited to your circumstances
- Access first home owner grants and schemes like the 5% Deposit Scheme
Whether you're looking for the lowest rates, need lower repayments, or want to understand your home loan options, our team can guide you through every step. We'll help you understand loan to value ratio (LVR), explore home loan features like portable loans, and explain how different home loan rates comparison affects your application.
Invest in property with confidence and secure your financial stability. Achieving home ownership starts with understanding what lenders look for and presenting your application in the strongest possible position.
Call one of our team or book an appointment at a time that works for you to discuss your home loan needs and get your journey started.