Home loan guide / Home loans explained

Why serviceability is essential to an affordable home loan

6 min read

Diem Tran

Serviceability plays a massive role in determining approval & ensuring you're given an affordable home loan. But what exactly is serviceability, & what steps does a lender take when calculating yours?

As a first-time borrower, there are many home loan phrases you need to get familiar with, from Lenders’ Mortgage Insurance (LMI) to settlement and offset. One term you may come across during your home loan application is serviceability.

Serviceability plays a massive role in determining approval and ensuring you are given an affordable home loan. But what exactly is serviceability, and what steps does a lender take when calculating yours? Read on to find out!

What is serviceability?

Serviceability is a step in the home loan application process where a lender gauges your ability to pay off your home loan by putting your income and ongoing expenses under a microscope. This helps them understand how much you could comfortably afford to borrow and repay every month — plus, it ensures responsible lending.

When a borrower applies for a home loan, it’s crucial that the lender acts in the borrower's best interest and does not offer a product they cannot afford. It also helps safeguard themselves against potential punishment from the Australian Prudential Regulation Authority (APRA), which cracks down on lenders who do not adhere to responsible lending practices.

Once a lender gathers this financial information, they will calculate your loan-to-income ratio, which gives them an indication of how much of your income will be committed to your proposed loan.

How lenders calculate serviceability

In Australia, loan-to-income ratio, or LTI, is calculated by using your after-tax income and subtracting expenses and any other liabilities or debts you may have, including credit card debt or repayments you make to another loan — such as a personal, car or business loan.

It’s important to note that the way your income may be assessed can vary between lenders, as they may have their own criteria or use different processes. It’s also tricky to give a definitive answer, as no two borrowers have the same income. Whether a borrower has a full-time or part-time income, is a sole trader, freelancer or receives overtime payments, it is up to the lender to determine if the applicant’s income is sufficient for the loan.

In some cases, if a borrower has a side hustle, a lender may not consider this legitimate income unless you can prove that you’ve maintained the job for a long time, or that you can consistently rely on receiving income from this side hustle.

Home loan serviceability — what else do I need to know?

Lenders need to feel confident that a borrower can make their repayments (on their loan and their other commitments) on time every month before they can be approved. When determining your eligibility, a lender will also apply a serviceability buffer against the home loan interest rate a borrower is applying for.

APRA expects lenders to apply a serviceability buffer of at least 3% when reviewing a home loan application. For instance, if you are looking to borrow at a rate of 4.30%, the lender will assess your ability to make repayments at 7.30%. You may find this a bit of a head-scratcher but part of being a responsible lender is ensuring you’ve been stress-tested for potential rate fluctuations and that includes testing whether you're able to meet repayments in a higher rate environment.

As we can see, serviceability helps borrowers receive home loans that align with their overall financial circumstances and prevents them from spending beyond their means. To ensure our potential first-home buyers are protected before we provide credit assistance, Tic:Toc performs a preliminary assessment.

This assessment helps us determine whether our home loans are suitable for you and your financial situation. It’s our job to ensure that our products help you meet your requirements and objectives through home ownership, and not land you in a place of financial hardship.

How can I increase my home loan serviceability?

Applying for a home loan is all about putting your best financial foot forward, from regularly saving to having minimal debts — it may also mean increasing your serviceability to better your chances of approval. If you are looking to approach a lender in the future, here are five ways you can increase your serviceability:

  • Increase your income — This is probably the most obvious way to increase your serviceability, though that’s not to say it’s the easiest! If you’ve been thinking about switching jobs or asking your employer for a raise, now may be the time to do it!

  • Minimise credit card limits — Even if you’ve only used one-third of your card’s limit, lenders will consider the full credit amount before making their decision. If you want to keep your credit card for emergencies, consider lowering your limit to improve your serviceability.

  • Pay down debt — It also might not be a bad idea to get rid of that lingering personal debt. Every bit counts when it comes to impressing a potential lender – it’s a fairly reliable way of showing credit providers that you can be relied on to repay your loans, no matter how big or small, on time (or ahead of time) and that you are responsibly meeting your repayment amounts. This is a solid way to boost your home loan serviceability.

  • Reduce your expenses — From cutting back on takeout meals to getting smarter with your online shopping, take a look at your budget to find areas where you can cut back. Putting numerous purchases on Buy Now, Pay Later services, like Afterpay, can also be a red flag for some lenders. It helps to show a lender you can manage money responsibly and this means being able to afford your lifestyle including any potential home loan repayments.

  • Pay your bills on time — Your credit report maintains a record of your commitments to all sorts of financial transactions, like your phone bill, your utilities, and any personal or car loans you may have. When you miss a bill payment or even if you’re late, this could be recorded on your report which lowers your credit score. Having a lot of missed or late payments will be a red flag for any lender assessing your application.

Discover the award-winning home loans at Tic:Toc

Getting ready to purchase a home is an exciting time in anyone’s life — but it can also be filled with countless steps and challenges. Tic:Toc simplifies the home loan application process by providing a totally automated experience.

We want to get you through the front door of your new home or investment as soon as possible, which is why we offer real-time lending decisions. We let our clever technology assess your serviceability while we take the time to explain how our rates work so you can feel confident in your decision. We can also help you refinance your current loan to get a better deal and reduce your repayments.

No matter what stage you’re at on your journey to property ownership, Tic:Toc is your number one choice for quick and competitive home loans. Get in touch with us today to discuss your options.

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