Mortgage a Home: Navigate Serviceability Requirements with Ease
While navigating the process of securing a mortgage for your dream home, understanding 'mortgage serviceability' might initially feel like a challenging obstacle. However, it serves as a crucial safeguard, ensuring you don't borrow more than you can comfortably manage, especially in today's evolving interest rate environment.
When it comes to mortgaging a home, everyone benefits from smooth sailing - you, your lender, and your broker. Taking on more than you can handle financially can be stressful and lead to negative consequences for all parties involved.
That's where mortgage serviceability comes in.
Before approving your home loan application, your lender will carefully assess your finances to ensure you can comfortably meet the repayments. This process is known as a mortgage serviceability assessment.
We'll dive deeper into what to expect from a mortgage serviceability test and share valuable tips to improve your chances of securing your home loan.
What is mortgage serviceability?
Lenders and brokers have a duty of care to ensure you’re not provided with a loan that’s beyond your means.
In fact, the National Consumer Credit Protection Act (2009) is in place to ensure lenders and brokers are following responsible lending practices (here’s that hot water we were talking about earlier).
While this protects consumers from landing in financial dire straits, (which doesn’t have anything to do with getting money for nothin’, unfortunately) … it means that lenders and brokers are serious about checking serviceability, which can create some strict hoops for you to jump through.
So how is serviceability calculated?
Your serviceability is calculated by looking at your income and subtracting your expenses and debt repayments (including your new home loan repayment amount).
We then need to work out what portion of your monthly income can go toward repayments.
This is called your debt service ratio.
It’s also important to calculate your debt-to-income ratio, which is a measurement used to compare your total debt to your gross household income.
Your credit card limit will also be taken into account and you may need to prove that you have the means to pay off the limit within three years, even if the balance is $0.
Finally, a serviceability buffer is applied to the current interest rate to see if you’ll be able to continue repayments should interest rates rise.
In 2021, the Australian Prudential Regulation Authority (APRA) raised the serviceability buffer from 2.5% to 3%.
This buffer amount has been the topic of much discussion, with some arguing it’s making it tough for people to pass the assessment and refinance to a lower-rate loan. But APRA is remaining firm at 3% given the current state of interest rates.
How to increase your serviceability
Here are our top tips for increasing your serviceability score and improving your chances of home loan approval:
Pay down your debts to improve your debt-to-income ratio.
Reduce your expenses by cutting out non-essentials and looking for better deals on utilities.
Reduce your credit limits or cancel credit cards you’re not using, if appropriate.
Increase your income by starting a side hustle, asking for a raise, landing a higher-paying job, or even a second one (which we fully acknowledge is not possible for many families).
Other ways you can increase your chances of home loan approval:
Improve your credit score. Lenders will delve into your credit history to see if you’re good at making repayments.
Look at spending habits. Lavish overspending on non-essentials could raise a lender’s eyebrows.
Make savings. Showing that you can put away money on a regular basis will look good on your application.
How much can you safely borrow?
Buying a home is an exciting prospect, but you don’t want to stretch yourself beyond your means. This is especially important given the recent RBA interest rate hikes over the past year. But we’re here to help you crunch the numbers and find a loan that will work for you, not against you.
If you’d like to find out your borrowing power and what loan options are available, give us a bell.
Get your pre-approval today!
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
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