"Potential home buyers need to take all these factors into account if they want to maximise how much they borrow and acquire the house they desire! Don't take these lightly." - Alex Kenward, Finance Manager
With property prices soaring, knowing how to improve your home loan serviceability can be the difference between getting the keys or being shown the door.
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Lenders essentially make a business investment every time they loan money to home buyers. As such, they need to work out whether you're a safe bet, and they do this by assessing your home loan serviceability.
It's not just for the bank's sake, either. If you get a loan and can't pay it back on time, your capacity to get other loans down the track will be harmed due to chequered credit history.
The serviceability is calculated by combining all of your income such as your salary, rental income and interest from investments, and then taking away your expenses and other repayments you have, including your mortgage repayments.
"However, it is not always straightforward, especially when you take into account things like your employment status (ie. freelancer vs full-time) and how many dependents you have," says Brodie Haupt, CEO and co-founder of Aussie digital lending and payments provider WLTH.
"As part of the process of determining your serviceability, lenders will calculate your mortgage at 2.5% higher than the market rate to ensure that if there is a shift you will still be able to comfortably pay back your repayment.
"This is a safety net that they build into the calculations to protect themselves, but it is also to assist the consumer to ensure that they are not in a position where they will be unable to make their repayments if there is a shift in interest rates throughout the life of the loan."
Not all rental income is treated equally. Whereas 100% of your salary will go into the calculation, typically only 80% of rental income will be calculated.
"The reason for this is that they need to consider that the property won't always be tenanted, so the borrower won't be able to depend on the full rental return to cover their mortgage repayments."
The same goes for income from shares "due to the fluctuations in the market and the risk that shares could also depreciate in value".
"This means that lenders cannot accept 100% of investment income and will generally consider 80% (this varies between different institutions)."
The good news is that home loan serviceability isn't a static condition you're lumped with - there are ways you can improve it and thereby improve your chance at securing a loan at a good rate from a wide amount of products.
"Another benefit of increased serviceability is having a greater buffer to minimise risk if interest rates move," says Haupt.
"This will take a considerable amount of pressure off, and give you a safety net to fall back on if there is an unexpected change."
Here are five things Haupt recommends to improve your home loan serviceability.
1. Reduce credit limits
Even if you don't owe anything on your credit card your limit will still be considered as potential debt when lenders are assessing your position. As a borrower, this will make you much more attractive to the lender due to having fewer lines of credit and removing that potential risk.
2. Aim for stable employment
Being self-employed or a contractor can be viewed as a risk by some institutions. If you are in a new job and still under your probation period, this can also affect your serviceability, which is why it's best to start applying for the loan when you have passed probation as it allows you to demonstrate a constant and stable income stream.
3. Pay off BNPL loans
Buy Now Pay Later (BNPL) products are readily available in most stores now, they are easy to use and can be seen as a great way to manage cash flow, however, what many people don't understand is the effect that they have when applying for a home loan.
BNPL transactions often show up on a credit check, and generally, this will have a similar effect to credit cards that demonstrate when you are overextending yourself through these companies. To increase your serviceability, make sure you pay all of these debts off before applying for a loan.
4. Rein in spending
Before buying a home, it is important to budget and save money, not only for your deposit but to also demonstrate your spending habits to the lending. When you start thinking about getting a home loan it is important to cut back on your spending habits.
To borrow money, the lender will need to see your bank statements, and if there is a considerable amount of spending on takeaway and entertainment costs, this will affect your serviceability. Institutions want to see that you're demonstrating responsible spending habits, ensuring that they will trust you to make your repayments.
5. Pick the right lender
Know what you want and always shop around. Currently, in Australia, there is so much competition and with rates the lowest they've been for years, there is no better time to find the best products in the market.
Take advantage of comparison sites, read up on different lenders and institutions, and know exactly the kind of products you want to get access to.
A more efficient and effective lending solution for everyone.
Source: Money Mag
Thornton, D. (2021, April 16). Five ways to increase your borrowing power for a home. Money magazine. https://www.moneymag.com.au/how-to-increase-borrowing-capacity-serviceability?q=brodie+haupt