How do banks calculate loan serviceability?
Your serviceability is your ability to service (make repayments on) the loan.
This means that the lender will look at your income and expenses to determine your net income surplus (NIS) and the maximum amount they’re willing to lend you. There are a number of other factors that lenders will look at when assessing your borrowing capacity, but serviceability is the key.
The two main factors that are included in the service calculator are your income and your expenses.
Income
Income is from any or all of the following – Paid Salary, Dividends, share jobs, Rent received from Income Producing Real Estate, Business Profit.
Expenses
These are all the current liabilities you have; for example, house or car loan, credit card or personal loan plus you will need to calculate your monthly living expenses. These expenses plus the new lending facility at a stress rate (approximately 2% higher than the current rate) will determine your total expenses.
After you have subtracted your expenses from your income you will need to have a surplus for the loan to be considered.
It’s also important to keep in mind that not all of your income is treated equally, and lenders have a different rule for assessment residential investor income, second employment, and overtime and allowances.
Here’s an example of Broker software which demonstrates how lenders rules can affect the maximum borrowings to a customer: All the figures displayed are from the same information provided and the highest lender would lend; this example shows $981,291 from the highest lender compared to $861,907 from the lower lender. So, the choice of the lender can cost you the ability to lend $120,000 with the exact same application.
If you’d like to find a loan that suits your individual circumstances please, get in touch with us.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal financial situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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