How Lenders Assess Your Mortgage Repayments
When you apply for a home loan—whether you’re buying, refinancing or investing—banks and lenders run a “serviceability” check to confirm you can manage the repayments. Here’s a fresh look at what goes into that calculation.
1. Verifying Your Income
Steady Employment Earnings
Lenders favour applicants with predictable salaries. If you’re an employee, you’ll typically submit the last few pay slips and tax returns. Self-employed borrowers usually need to provide at least two years of financial statements and ATO returns to prove consistent earnings.
Rental Revenue
If you have investment properties, banks will include your rental receipts but apply a discount—often 20–30%—to cover:
- Periods of vacancy
- Maintenance and repairs
- Property management fees
Short-term rentals (Airbnb, etc.) face deeper cuts—sometimes up to 50%—due to their unpredictable cash flow.
Supplementary Income
Bonuses, overtime or side gigs may count toward your borrowing capacity, but only if they’re regular and well documented. Irregular extras are often excluded.
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2. Accounting for Debts and Living Costs
Debt-to-Income (DTI) Ratio
This measures your total monthly debts (including the new loan) against your gross income. A DTI above 6:1 is typically viewed as high risk by most lenders.
Existing Credit Commitments
All current liabilities are assessed:
- Outstanding mortgages
- Car loans or personal loans
- Credit card limits (calculated as if fully drawn)
Day-to-Day Expenses
Some lenders use standard benchmarks like the Household Expenditure Measure (HEM), while others examine your bank statements in detail. Expect scrutiny on:
- Groceries and utilities
- Transport and fuel
- Insurance premiums
- Childcare or school fees
3. Stress-Testing Your Repayments
Buffer Rate
Banks apply a higher interest rate—often 2–3% above your actual rate—to ensure you could still afford repayments if rates rise. For example, on a 6% loan, you might be assessed at 8–9%.
Why It Matters
This safety margin protects both you and the lender against sudden market shifts or rate hikes, helping to prevent financial strain down the track.
Key Takeaways
Knowing how serviceability is calculated gives you an edge when applying for finance:
- Consolidate or reduce existing debts.
- Maintain clear, well-documented income records.
- Be conservative with projected rental and bonus incomes.
- Plan for rate increases by building in buffer margins.
Ready to see where you stand? Consider chatting with a mortgage broker who specialises in investment finance to maximise your borrowing power in today’s market.
