After all the glitz and glamour banks and lenders throw in consumers’ faces with their fancy advertisements and “low interest rates,” at the end of the day, what they are really looking for in a potential customer is their serviceability level.
Essentially, serviceability is a crucial part of obtaining finance. It comes down to whether you are able to meet the repayments of your loan or not. The less serviceable you are, the less lenders are willing to let you borrow.
In order to define serviceability we have to look at a number of factors. Largely, serviceability looks at your income and financial situation against your debts and liabilities, as well as living costs. Lenders are trying to work out how much you can afford to set aside for a mortgage each month. Think of this as your “in” and “out” columns.
Your “in” column contains income that you obtain from any source – including your salary, any child support payments you may receive, rental property income, share dividends and other investments etc.
Whereas, as you can probably guess, your “out” column contains all outgoing expenses, including repayments and current debt; i.e. credit cards, living expenses, and other ongoing costs. Any children or other dependents, you have will also fall into this category. In addition, it should be noted that your “living expenses” will likely be based on an amount that the lender thinks is reasonable for your type of household. You may be particularly frugal with your expenses, but it doesn’t mean that the lender will take this into consideration.
After these numbers have been worked out, the remaining part of this equation is what the lender looks at to determine whether you can afford to make repayments to the loan.
You should take into consideration that when looking for approval for a loan, your total monthly debt expenses are expressed as a proportion of your gross monthly income. This is known as the ‘debt service ratio’ – and it should be set at a maximum of between30% and 35% of your gross income.
Furthermore rate rises are also calculated in and some lenders include a “buffer” that can affect buy-and hold investors. You may find that whilst you are rejected by one lender due to their serviceability requirements, you may be deemed serviceable by a different lender due to varying criteria.
Overall serviceability can be complicated when considering all of the different factors that lenders are required to consider to ensure that you can repay your loan. Luckily there are transparent ways you can access your serviceability through various online calculators.
For more information, contact one of our expert mortgage brokers on 02 9299 7044 or visit www.clarencestreetmortgages.com.au for more details.