A question we often get goes something along the lines of: ‘I make my repayments on time, and I save $1,000 per month, why is the bank saying I can’t service a loan?’ Here’s how banks conduct loan serviceability.
When banks and lenders calculate loan serviceability, they are essentially evaluating your ability to pay back a loan.
Lenders base this decision on a number of factors, including your income, the loan amount, and other commitments or extra expenses that you may have.
With all of these things in mind, the lender calculates a debt service ratio (DSR). In a nutshell, the DSR is the percentage of your monthly income expected to be spent on debt expenses.
Lenders usually cap this at 30 or 35%.
How banks conduct loan serviceability
Your base salary, known as ‘ordinary time’ on your payslip is the key factor here. But other income you ear can also be taken into account, such as bonuses, overtime and commission.
Overtime payments are included in serviceability calculations for those where it’s a condition of employment such as in the emergency services sector.
For other professions where overtime payments are more infrequent, only a proportion of overtime is included. However if you receive bonuses as part of your job which are consistent and can be evidenced over 2 years, this may also be used in your servicing calculations.
If you have a second job, you must be employed there for at least one year before this income can be factored into serviceability. And for investment properties, most lenders will consider between 75%-80% of the rental income (to allow for associated fees).
Lenders will also take into account Centrelink benefits like Family Tax Benefit if your children are younger than 11-years-old.
Reasons why loans can’t be serviced
If you have been making all of your repayments on time and saving a decent chunk of your income, you may well be wondering why a bank has just knocked back your loan application.
One explanation is that lenders calculate the repayments by adding a margin of 2.5% or more to the variable rate. This is known as an ‘assessment rate’. It’s used to predict whether you would be able to meet repayments if interest rates rose to 7.5 or 8%. This assessment rate is also used for all other mortgages you have i.e. investment loans.
Unfortunately, this – as well as credit card debt, student loans, car loans and the number of children or dependents living in your home – can negatively affect loan serviceability and make it much harder to get the finance you need.
Bearing these factors in mind can help you rearrange your finances and improve your chances.
How we can help
It’s our job to understand how lenders will assess your serviceability. If you’ve recently been advised by a lender that you can’t service a loan, don’t hesitate to give us a call, it’s not always a doomed situation.
We’d be happy to look at your individual situation, help you address any issues, and line you up with a lender that’s offering a great home loan.
