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 a bank calculates 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.
With all of these things in mind, the bank figures out 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%.
Of course, the borrower’s standard salary is considered here. But so too are bonuses like overtime, commission, and even company cars.
For nurses and the emergency services, all overtime payments are included in serviceability calculations.
For other professions where overtime payments are more infrequent, only a proportion of overtime is included.
If you have a second job, you must be employed there for a year before this income affects serviceability. And for investment properties, most banks will consider just 75% of the rental income (to allow for associated fees).
Lenders can also take into account Centrelink benefits like Family Tax Benefit if your children are younger than 11-years-old.
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 may be that lenders calculate 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%.
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.
If you’ve recently been advised by a lender that you can’t service a loan, don’t hesitate to give us a call.
We’d be more than happy to look into your individual situation, help you address any issues, and line you up with a lender that’s offering a great home loan.
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