Serviceability is fancy way of saying: we need to make sure you can afford this loan. A lender will assess your serviceability, and it affects both your home loan approval and how much you can borrow.
Serviceability is your ability to afford home loan repayments, impacting approval and how much you can borrow.
Lenders add a 3.00% interest rate buffer when calculating serviceability, affecting your borrowing capacity.
Improve serviceability by reducing existing debts and closing unused credit cards, not just paying them down.
When you apply for a home loan, a lender will consider all aspects of your budget, income and expenses when deciding whether or not to approve your application. One factor they review is serviceability – or your ability to afford the loan repayments, after considering all of your income, expenses and liabilities.
What is mortgage serviceability?
Serviceability is your ability to pay, or service, your home loan repayments each month. Lenders calculate your serviceability to ensure you can afford the mortgage and to work out how much of a home loan debt you can manage.
For instance, let's say you put in a loan application and your expenses include pricey private school fees, monthly trips to the beauty salon, lots of luxury restaurant meals and UberEats every other day. If your income is $250,000, then there's no issue – even with all of these expensive lifestyle costs, you can still "service" a home loan.
But if these are your spending habits and your income is $80,000, the bank might have some concerns that you won't be able to afford your loan repayments.
In technical terms, they'll be worried that your loan won't "service".
Every bank has a different way of calculating serviceability, and different criteria. This means Lender A could look at your income and expenses and decide to lend you a maximum of $480,000. Lender B could use those same figures and lend you $500,000. And lender C might look at those figures and decide you don't service at all, and they don't want to approve your application.
That said, they all tend to fall within a similar range – and while lenders don’t often make their exact serviceability standards public, they do tend to calculate serviceability in a similar way.
How to calculate your serviceability
While every lender determines your serviceability slightly differently, you can get a general idea of your borrowing power with our borrowing power calculator.
To use the calculator, enter your income from all sources. Then enter any other loans you have, the total limit of all your credit cards and your number of dependants.
What is the difference between serviceability and borrowing power?
Serviceability is your ability to afford your monthly repayments, based on the size of your loan and your income. In really simple terms: if you earn $2,000 a week and you're applying for a home loan that will cost $500 a week, can you afford it?
Meanwhile, borrowing power relates to the size of the loan they are willing to lend you. Depending on your income, your spending habits and the bank's own criteria, they will decide what your borrowing power is.
For example: according to our own borrowing power calculator, a single person with no dependants, earning $90,000 a year with a $5,000 credit card limit, has a borrowing power of $548,000. If this hypothetical borrower applied with 5 different banks, they might find their borrowing power changed with each bank, depending on each bank's specific poilicies and criteria.
How do banks calculate serviceability?
In general, lenders calculate serviceability by adding together your income from all sources, subtracting your expenses and debt liabilities and adding in the monthly mortgage payment. Each bank treats sources of income differently - for instance, some banks are happy to include your bonuses at work, whereas other lenders sees this as "irregular income" and won't consider it in your application.
Income can come from a variety of sources beyond your job. Lenders will generally take into account income from:
Salary and wages
Rental property income
Investments and dividends
Centrelink benefits
Self-employed income
Bonuses
Income
Some types of income will not be included in full in lenders’ calculations. Rental income, for instance, is assumed to fluctuate, as an investment property could go untenanted for a period of time. Likewise, investments such as shares have the potential to fluctuate in value, or even to depreciate.
Because of this, most lenders will only accept up to 80% of gross rental income or other investments when assessing your total income.
Debt
Lenders also build a buffer into their calculations. While you may be able to service a home loan of a certain size at current interest rates, lenders want to know that you’ll continue to be able to service this debt should rates rise substantially.
Following APRA guidelines, lenders add an interest rate buffer of at least 3.00% to serviceability calculations. Let's say you want to borrow $500,000 and the loan's interest rate is 6.5%. The your monthly repayments would equal $3,160.
But your lender applies a 3.00% buffer on top. That's rate of 8.50%. Your monthly repayments at that level equal $3,845 – around $700 more per month.
This is the figure your lender uses to see if you can afford the repayments. Even though it's not the amount you're actually paying, it's the amount they are calculating your "serviceability" on, so they can be sure you can afford the repayments if rates rise.
Finder survey: How stressed are Australians about paying their mortgage in the current environment?
Response
Somewhat stressed
59.63%
Not at all stressed
22.47%
Extremely stressed
17.9%
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
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.
Increasing income can often be influenced by factors beyond your control. You can ask your employer for a pay rise, invest in assets that will provide regular income or take on a second job, but some of these strategies may not be practical for you.
However, you have far more control over your expenses. You can decrease the liabilities you have by paying down your existing debt. Work out a budget to tackle reducing your debt. You can also close credit cards or store cards you don’t use, as the bank will take into consideration your limits, not your debts, when calculating your serviceability. Even if you don’t owe money on them, the credit limit on these cards can eat into your borrowing power.
Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards.
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