Serviceability
A lender assessment of whether a borrower can meet loan repayments from their income after accounting for expenses, existing debts, and a buffer.
In detail
Serviceability calculators combine assessable income, living expenses, existing liabilities, and an assessment rate buffer to determine a borrower surplus. APRA requires authorised deposit taking institutions to apply a serviceability buffer of at least 3 percentage points above the product rate.
Income is shaded depending on type. Base salary is usually taken at 100 per cent, overtime and bonuses are often shaded to between 60 and 80 per cent, and rental income is commonly assessed at 75 or 80 per cent to allow for vacancy and expenses. Each lender applies slightly different rules which is why the same file can service at one bank and decline at another.
Why it matters for brokers
Serviceability is the single biggest driver of borrowing capacity. Brokers who understand how each lender treats income and expenses can match clients to the right lender on the first attempt.
Example in practice
A PAYG applicant earning $120,000 base salary plus $15,000 annual overtime has different assessable income at two lenders. Lender A shades overtime at 60 per cent giving $129,000 assessable. Lender B shades it at 80 per cent giving $132,000 assessable. That small gap can be the difference between approval and decline on a tight file.
Related terms
Debt to Income Ratio (DTI)
Total debt divided by gross annual income, used by lenders as a supplementary risk measure alongside serviceability.
Loan to Value Ratio (LVR)
The loan amount expressed as a percentage of the property value, used by lenders to assess risk on a home loan.
Year to Date (YTD) Income
The cumulative gross income an employee has earned since the start of the financial year, shown on each payslip.
Responsible Lending
The legal framework under the National Consumer Credit Protection Act requiring lenders and brokers to assess whether a loan is not unsuitable for the borrower.
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