When applying for a home loan, one of the most critical steps is the serviceability assessment. This evaluation determines your borrowing capacity and whether lenders will approve your Home Loan application. Understanding this process can significantly impact your success in buying a home.
What is a Serviceability Assessment?
A serviceability assessment is a comprehensive evaluation that lenders use to determine how much you can realistically borrow. Unlike simply looking at your income, this assessment considers your entire financial situation, including:
• Your current income and employment stability
• Existing debts and financial commitments
• Living expenses and lifestyle costs
• Future interest rate changes
• Your dependents and family circumstances
Mortgage Brokers like Shield Mortgage Brokers work with multiple lenders who each have different serviceability criteria, which means they can access Home Loan options from banks and lenders across Australia to find the most suitable match for your circumstances. For example, a client who went through a divorce and has two children had their borrowing power impacted by essentially having two 'dependents'. Knowing that the client has a shared care arrangement for the kids, we were able to work around this policy with a bank and effectively create the borrowing power as if there was only one dependent. This added $50,000 to their borrowing capacity and helped get them into a more suitable home.
Key Factors That Impact Your Serviceability
Income Assessment
Lenders examine various income sources, including salary, bonuses, rental income, and investment returns. They typically require recent pay slips and bank statements to verify your earnings. Self-employed borrowers may need to provide additional documentation such as tax returns and profit and loss statements.
Debt-to-Income Ratio
Your existing debts significantly impact your borrowing capacity. This includes credit card limits, personal loans, car loans, and other financial commitments. Even if you don't use your full credit card limit, lenders often assess based on the total available credit.
Living Expenses
Lenders use the Household Expenditure Measure (HEM) to assess your living costs. This benchmark considers expenses like groceries, utilities, transport, and entertainment based on your family size and location. Inner West residents should be aware that living costs in Sydney are typically higher than other areas.
Interest Rate Buffers
Lenders don't just assess your ability to meet current repayments. They apply interest rate buffers of 2-3% above the current home loan interest rate to ensure you can still service the loan if rates increase.
How Loan Amount and LVR Affect Serviceability
The loan to value ratio (LVR) plays a crucial role in your application process. If your LVR exceeds 80%, you'll likely need to pay lenders mortgage insurance (LMI), which adds to your overall borrowing costs.
A lower LVR can provide several advantages:
• Access to interest rate discounts
• Avoiding LMI premiums
• More Home Loan options available
• Potentially higher borrowing capacity
Common Serviceability Mistakes to Avoid
Underestimating Expenses
Many borrowers underestimate their actual living expenses. Review your bank statements carefully over several months to get an accurate picture of your spending patterns.
Ignoring Credit History
Your credit score and history significantly impact serviceability. Late payments, defaults, or high credit utilisation can reduce your borrowing capacity or affect the interest rate you're offered.
Not Considering All Costs
When calculating home loan repayments, remember to factor in additional costs like stamp duty, legal fees, building inspections, and ongoing property maintenance.
Applying Without Professional Guidance
Different lenders have varying serviceability policies. What one bank declines, another might approve. A Home Finance & Mortgage Broker can help identify lenders whose criteria align with your circumstances.
Improving Your Serviceability Position
Reduce Existing Debts
Pay down credit cards and personal loans before applying. Consider reducing credit card limits to improve your debt-to-income ratio.
Stabilise Your Income
If possible, avoid changing jobs shortly before applying for a home loan. Lenders prefer stable employment history.
Build Your Deposit
A larger deposit improves your LVR and demonstrates your savings discipline to lenders.
The Benefits of Professional Assessment
Working with experienced Mortgage Brokers provides access to a streamlined application process. They understand different lenders' serviceability criteria and can help position your application for success.
Professional brokers can also help you understand the differences between variable interest rate and fixed interest rate options, and how each might impact your serviceability assessment.
Getting Pre-Approved
Home Loan pre-approval provides clarity on your borrowing capacity before you start house hunting. This process involves a preliminary serviceability assessment and gives you confidence when making offers in the competitive Inner West property market.
Pre-approval also allows you to:
• Set a realistic budget for your property search
• Move quickly when you find the right property
• Negotiate with confidence
• Understand your deposit requirements
Consider features like offset accounts when discussing your Home Loan options, as these can provide tax advantages and help you pay off your loan faster while maintaining flexibility with your home equity.
Call one of our team or book an appointment at a time that works for you to discuss your serviceability and explore the Home Loan Rates available for your situation.
