Affordability vs serviceability
Andrew Mirams is the managing director of Intuitive Finance and has around three decades of experience in the mortgage industry. He explains the difference between able to "afford" a home loan and being able to "service" the loan.
"The term serviceability means the ability of a borrower to meet loan repayments. Just because someone has a reasonable income, it doesn't mean they will automatically be given the green light.Your loan application is assessed on a number of contributing factors, including:
- Income, which can include your salary, rental income and investments.
- Living expenses, which can be higher for high income earners who tend to live more lavish lifestyles. That is, their expenses rise up to meet their income!
- Debt expenses and other commitments such as credit card limits or personal loans.
This assessment is known as the 'debt service ratio' and is a borrower's monthly debt expenses as a proportion of monthly income. This helps lenders evaluate whether they can afford the loan.
Each lender has its own assessment method; that's why it pays to shop around for the bank that is best suited to your individual financial circumstances.Conversely, the term affordability refers to a borrower's capability to pay off the home loan.
Lenders will consider whether an applicant can continue to live the lifestyle they do now while making mortgage repayments. If not, then the loan application may not be approved.