A question we often get goes something along the lines of: ‘I make my repayments on time, and I save $1,000 per month, why is the bank saying I can’t service a loan?’ Here’s how banks conduct loan serviceability.
When a bank calculates loan serviceability, they are essentially evaluating your ability to pay back a loan.
Lenders base this decision on a number of factors, including your income, the loan amount, living costs and other commitments or extra expenses.
How banks conduct loan serviceability
Of course, the borrower’s standard salary is considered here. But so too are bonuses like overtime, commission, and even company cars.
For nurses and the emergency services, all overtime payments are included in serviceability calculations.
For other professions where overtime payments are more infrequent, only a proportion of overtime is included.
If you are casually employed or have a second job, you typically need to be employed there for a minimum one year before that income can be used. And for investment properties, most lenders will shave at least 20% of rental income to allow for risks such as maintenance costs, agent management fees and for times that the property is vacant and not generating income.
Lenders can also take into account some forms of Centrelink payments such as Pensions or Family Benefits where they are long term.
Reasons why loans can’t be serviced
If you have been making all of your repayments on time and saving a decent chunk of your income, you may well be wondering why a bank has just knocked back your loan application.
One of the factors that can affect servicing is that lenders apply a buffer to all mortgage commitments (new and ongoing). This is known as the ‘assessment rate’. It is used to predict whether you would be able to meet repayments without hardship if rates were to increase by a few percentage points.
This – as well as credit card debt, student loans, car loans and the number of children or dependents living in your home – can negatively affect loan serviceability and make it much harder to get the finance you need.
Bearing these factors in mind can help you rearrange your finances and improve your chances.
How we can help
If you’ve recently been advised by a lender that you can’t service a loan, don’t hesitate to give us a call or drop us an email.
We’d be more than happy to look into your individual situation, help you address any issues, and see what we can do to help you with a great home loan.