How Income Impacts Serviceability Assessment

How Income Impacts Serviceability Assessment

Serviceability is a considerable factor when borrowing for a new home. When you’re looking for a loan, you might wonder, “How much can I borrow?” But a more crucial question is, “How much can I comfortably repay?” Securing a home loan is a major financial milestone, but managing those ongoing repayments is the real test. 

It’s all about ensuring you can comfortably meet these payments without risking financial stability. This is where serviceability comes into play—assessing how much you can realistically afford to repay, ensuring that your dream of homeownership doesn’t become a financial burden.

What Is Home Loan Serviceability?

In simple terms, serviceability is your ability to repay loans based on income. Before approving a loan, lenders will scrutinise your income to determine whether you can comfortably manage the repayments alongside your existing financial commitments.

Lenders assess your serviceability using various factors to ensure you can keep up with your mortgage repayments now and in the future.

The Key Factors That Influence Home Loan Serviceability

Lenders consider several factors to determine whether you can repay a loan. These factors evaluate your financial situation and potential risks in repayment. Here are some key factors that influence home loan serviceability:

1. Income: Your income is a fundamental factor in determining your financial stability. When you apply for a loan, lenders will assess your income to gauge whether you can consistently meet the required repayments. This evaluation helps them decide whether to approve your loan application.
   A secure job can also boost your serviceability. Lenders favour borrowers with stable, long-term employment in secure industries. Frequent job changes or work in volatile sectors might impact your serviceability.
2. Living Expenses: Lenders will look at your household expenses—utilities, groceries, transport, insurance, etc. This helps them understand how much your income is available for loan repayment. The number of dependents you support also affects your serviceability, as dependents typically reduce your disposable income.
3. Debt-To-Income Ratio: This crucial ratio compares your total debt to your gross income. A lower debt-to-income ratio signals a healthier financial position and a higher likelihood that you’ll manage the loan repayments comfortably.
4. Loan Amount and Interest Rate: Lenders consider how potential fluctuations in interest rates might affect your ability to repay the loan. A larger loan amount means higher monthly repayments, which impacts serviceability. Similarly, higher interest rates increase monthly repayments, which affects your ability to service the loan.
5. Credit History: A strong credit score makes securing a loan easier, as it reflects responsible borrowing behaviour. A higher score reduces the lender’s risk and improves your serviceability. Lenders will also review your credit report for any history of late payments or defaults, which could affect your serviceability assessment. You can request your credit history from your bank or use services such as Equifax and other third-party paid services to determine your credit score.
6. Savings and Assets: Having substantial savings can improve your serviceability. Lenders view savings as a sign of financial discipline and a cushion against unforeseen expenses.

Payments That Count As Income

Lenders assess various types of payments when evaluating your income for serviceability:

1. Salary and Wages: The most straightforward and widely accepted form of income, including your regular paychecks from employment, is typically shown as gross income.
2. Bonuses and Overtime: Performance-based incomes like bonuses and overtime are accepted, though often at a discounted rate, as they’re not guaranteed.
3. Self-Employment Income: If you’re self-employed or run a business, your net business income (after expenses) is considered. Lenders may request tax returns from previous years to assess consistency.
4. Investment and Rental Income: Income from dividends, interest, or investments, as well as rental income from properties you own, is included.
5. Pension and Superannuation Payments: Pension payments are also considered, with lenders evaluating the reliability and longevity of this income.
6. Government Benefits: Certain benefits, such as family tax benefits, childcare subsidies, or disability support payments, may be included, though lenders assess these on a case-by-case basis.
7. Alimony or Child Support: If legally documented and consistent, these payments are considered income. Lenders check for consistency to ensure reliable repayment.
8. Foreign Income: Income from overseas may be included, but lenders consider currency exchange risks and income stability.
9. Casual or Part-Time Income: Casual or part-time income can be included, but lenders might discount it or require a history of consistent earnings to ensure reliability.

While all these sources of income are considered, the lender’s policies will dictate how much weight each one carries in the overall assessment.

How Do Banks Determine Your Liabilities?

Banks evaluate your liabilities to assess your serviceability and overall financial condition. Here’s how they do it:

1. Credit Report Check: Banks access your credit report, which gives a comprehensive view of your existing credit accounts, including personal loans and debts. This report details credit limits and outstanding balances, helping banks assess your total liabilities.
2. Mortgage Statements: If you already have a loan, you must provide your mortgage statement detailing your outstanding balance, monthly repayments, interest rate, and remaining loan term.
3. Utility Bills and Ongoing Subscriptions: Recurring payments like utility bills, insurance premiums, and subscriptions are factored into your expense assessment, affecting your perceived liabilities.
4. Government Liabilities: Any taxes owed to the government are considered liabilities. Banks may request recent tax returns or tax debt statements. Outstanding student loans are also considered.
5. Other Financial Commitments: Financial commitments like car leases, equipment rentals, or property leases are counted as liabilities.

How To Improve Your Serviceability

To maximise your chances of securing a loan, improving your serviceability is crucial. Here are some strategies:

1. Increase Your Income: A higher salary directly improves your serviceability. Look for additional work, such as part-time, freelancing, or overtime. These extra earnings can enhance your serviceability.
2. Reduce Your Existing Debts: Lower your debt-to-income (DTI) ratio by paying off personal loans, credit card balances, or other small debts. Consider closing unused credit cards to reduce perceived credit risk.
3. Cut Down On Living Expenses: Trim non-essential expenses to free up income for loan repayments.
4. Minimise Dependents: While you can’t always change the number of dependents, it’s important to be mindful of their impact on your borrowing capacity.
5. Maximise Rental Income: If you own rental properties, consider increasing the rent where possible. Higher rental income boosts your serviceability.
6. Manage Your Credit Score: A higher credit score can lead to better interest rates and loan terms, improving your serviceability. Maintain your credit score by paying bills on time and avoiding unnecessary credit applications.
7. Limit New Financial Commitments: Avoid taking out new loans or credit cards when applying for a major loan. Postpone non-essential large purchases until your loan is approved.
8. Shop Around For Lenders: Don’t settle for the first lender you find. Compare lenders and their serviceability criteria. Some lenders are more lenient with certain income types or have lower living expense benchmarks.
9. Consider A Joint Application: If your spouse or partner has a stable income, applying for a loan jointly can improve your overall serviceability. Combined income and shared expenses enhance your borrowing capacity.

Practical Tips for Enhancing Your Home Loan Serviceability

Navigating the world of home loans can be daunting, but understanding and improving your serviceability can make a significant difference. Here are some practical tips to help you enhance your serviceability and increase your chances of securing a home loan:

1. Build an Emergency Fund: A robust emergency fund can cushion against unexpected expenses and financial shocks. Lenders view an emergency fund as a sign of financial preparedness and stability, which can positively impact serviceability. Aim to save at least three to six months’ worth of living expenses.
2. Avoid Large Purchases Before Applying: If you plan to apply for a home loan, it’s wise to avoid making large purchases or taking on new debt shortly before your application. Major expenses can affect your debt-to-income ratio and overall serviceability. Keep your financial situation steady and focused on improving your loan application.
3. Refinancing Existing Loans: Consider refinancing existing loans to a lower rate. This can help reduce your monthly repayments and improve your serviceability. Lower repayments can enhance your borrowing capacity and make you a more attractive candidate for a home loan.
4. Regularly Review Your Budget: Reviewing and adjusting your budget regularly can help you identify areas where you can cut back on unnecessary expenses. This can free up more money for loan repayments and improve your overall financial health. Consider using budgeting apps or tools to track your spending and savings.
5. Seek Professional Financial Advice: Consulting with a financial advisor or mortgage broker can provide valuable insights into improving your serviceability. These professionals can offer tailored advice based on your unique financial situation, helping you navigate the complexities of home loans and serviceability assessments.
6. Stay Informed About Market Trends: Staying current with interest rates, housing market trends, and economic conditions can help you make informed decisions about when to apply for a loan. Understanding market fluctuations can also help you time your application effectively and secure the best possible terms.

Enhancing Your Loan Serviceability

Home loan serviceability is determined by thoroughly assessing your income, expenses, liabilities, and overall financial condition. You can enhance your serviceability and secure better loan terms by boosting your income, reducing debts, and managing expenses wisely. Understanding and optimising these factors can help you achieve your homeownership dreams while maintaining your financial health.

Ready to take control of your home loan journey? Whether you’re looking to refinance existing loans for a sharper rate or seeking expert advice on securing the perfect mortgage, we’re here to help.

Contact our experienced team at Rateseeker; we’re helping Aussies all over the country open the doors to their new homes without the hassle.