Is your financial situation serviceable? Serviceability explained

What does serviceability mean? And how do you know if your financial situation is serviceable? If your lender says your financial situation is a serviceable one, it means they believe you can comfortably afford to make repayments on your home loan, even if interest rates go up a little.

Why is it important?

Well, my fellow Australian, serviceability has become an increasingly important topic in the wake of the Global Financial Crisis (GFC) and 2019’s Banking Royal Commission.

One of the largest contributing factors for the GFC was irresponsible lending; expenses weren’t validated enough, and customers were taking out much more credit than they could reasonably carry. So, when the US economy turned sour in 2007, living expenses increased and the defaults started piling up. This caused a domino effect, and brought many home loan customers unstuck as housing collapsed.

Tic:Toc is fervently aware of this, and we’d like to avoid a repeat of the GFC, please. We take our obligation to lend responsibly very seriously, so we need to make sure our customers are serviced to the appropriate standards; we’ll only lend what we know you’ll be able to afford, and we factor in things like your ongoing income and living expenses, as well as potential future changes in your variable interest rate.

What does it mean for you?

Being classed as ‘serviceable’ can mean a world of difference when you have a home loan. Yes, to become what a lender considers ‘serviceable’, you may need to take extra care of your financial health. But, it means when you do purchase a home, you’ll be able to rest a little easier knowing your repayments are within your means, instead of sitting on the borderline of affordability.

For example, if you have a high loan amount compared to your income, and your repayments are large – you may quickly find it difficult to stay afloat. Especially if you lead a lavish lifestyle (as in, your expenses are high). This type of scenario puts people at financial risk. Part of a credit providers obligation is to lend responsibly – because we don’t want our customers (or anyone) to struggle under the weight of a loan which is too large.

Let’s pop the hood. What actually determines serviceability?

The math is clear:

(annual net income – annual expenses) / annual commitments = Net Surplus Ratio

Confused? Don’t be, we’ll break this down.

This formula is a basic version of how lenders determine serviceability, but it’s important to note not every lender uses this exact method, and there are quite a few other calculations which happen behind the scenes to determine your net income, expenses, and commitments. For example, lenders are required to apply an assessment rate or buffer to your base home loan rate, just to make sure you could afford to meet repayments if home loan rates are to increase in the future. In July 2019, the Australian Prudential Regulation Authority (APRA) lowered this buffer from a minimum of 7% to a minimum of 2.5% above the actual rate, before revising the buffer again to 3.0% in October 2021.

Let’s look at it piece-by-piece:

Annual: refers to the time period of a single year. It’s important the calculation has a consistent reference to time. So, if you know your total monthly expense amount, you’ll need to convert it to an annual figure (and vice versa). Because home loans are calculated in terms of years (usually up to 30), most lenders will ask for figures in an annual amount when requesting information from you.

Net income: the income you take home, after tax. You can find out how much tax you pay with the ATOs Simple Tax Calculator.

Expenses: the amount you spend on living. There are two types:

Non-Discretionary/Basic expenses: this includes clothing, groceries, transport, utilities, personal care and other basic living expenses.

Discretionary expenses: this includes entertainment, recreation, telephone, internet, TV subscriptions, childcare, education, insurance, medical and health expenses.

Finding it hard to keep your expenses down? We’ve got some tips to stay financially fit.

Commitments: the ongoing costs you are locked into. In other words, your debts. This includes any existing home loans, personal or car loans, and any open lines of credit such as a credit card. When calculating your NSR, this will also include your new home loan repayments.

Net Surplus Ratio (NSR): the golden number. A ratio of 1.00 or higher is typically classed as serviceable. Anything 0.99 and below usually isn’t.

So, let's see how it works:

For example, let's say you're an applicant refinancing with your plus one, with a combined annual net income of $140,000, annual expenses of $40,000, with annual commitments totalling $89,000.

First, we take our formula:

(annual net income – annual expenses) / annual commitments = Net Surplus Ratio

Then, we'll plug our figures in:

($140,000 – $40,000) / $89,000 = 1.12

Hey presto! The NSR for this scenario is 1.12, meaning based on this information alone (and ignoring other loan eligibility criteria), the loan may be considered serviceable.

It’s important to note that, even though this example would be classed as serviceable, it doesn’t guarantee that the home loan application will be approved. There are other eligibility criteria the application has to meet (this is what ours looks like), and the application has to adhere to the requirements of the lender’s credit policy, too.

Have a big deposit but keep getting rejected?

Having a big deposit doesn’t necessarily mean you are serviceable in the eyes of a lender. If you put more money into the home (for example, putting a 20% deposit down instead of 10%), your repayments over the life of the loan will be lower. And having lower repayments (which are factored into the 'annual commitments' portion of the formula above), rather than a larger deposit, has more of an influence on NSR.

You could also have what most would consider a large deposit (and therefore lower repayments), but be tripped up by high expenses or large amounts of annual commitments.

How does Tic:Toc calculate serviceability?

We let our clever tech do it. When you apply for a Tic:Toc home loan, we’ll ask you questions about:

• your income, expenses and other commitments;
• the property you wish to borrow for; and
• your loan details, like the size of your deposit and your borrowing amount.

Then we take a relaxing 2-second seat while our tech crunches the numbers. Your NSR is then generated based on the information you provide.

Yep, it’s that easy.

Why is it so fast? Using our tech innovations, we digitally validate your income and expenses through your bank. This means that, with your authorisation, we receive digital read-only copies of your bank statements. Our technology classifies the expenses, and lets us know what your total incoming and outgoing figures are. If you have a cash deposit saved, we can instantly confirm how much you have ready to go, too.

Having the cold hard facts direct from the source allows us to make faster, more responsible decisions. And it’s not just about saving time. Since we verify your financial position down to the dollar, it’s a more responsible way to lend.

Digital validation for home loans might sound spooky – it is pretty new, after all. But don’t be wary, we take security very seriously. If you’re still not sure, we also allow an option for manual submission of your bank statements (but this takes longer).

How can you find out how serviceable you are?

Most lenders won’t be able to tell you an approximation of your serviceability without an application being submitted. The best way to find out without submitting an application is through a calculator. We don’t have one yet (but watch this space…).

In the meantime, we recommend using Helia's Calculator as a guide to serviceability (although please note your specific loan circumstances will impact final servicing).

Learn more:

Borrowing power explained.

7 ways to hack away at your home deposit savings goal.

How to refinance your home loan.