What is a serviceability assessment?
Estimated read time: 2 Minutes
A serviceability assessment is the stage of the home loan process when the borrower is assessed on their ability to pay back their loan. The assessment takes place during the application for the loan and looks at their income, expenses and other factors. We'll take a look at the assessment process in more detail.
What is serviceability?
In simple terms, 'serviceability' refers to the ability of someone to make repayments on a loan, according to the person's income and expenses.
Mortgage serviceability is generally calculated by subtracting the borrower’s loan repayments and other expenses from their income. Other factors may also be considered by some lenders.
Many lenders use the serviceability calculation as well as the debt service ratio - the proportion of the applicant’s income that can go toward paying off a loan - to assess the borrower’s capacity to pay off the loan.
What is a serviceability assessment?
A serviceability assessment is the process of considering all the factors that contribute to an individual’s financial situation, including the number of children or dependents. Typically, an individual’s income is balanced against their expenses, liabilities and other outgoings.
Tip: Lenders may add a buffer to the assessment outcome in order to ensure the applicant will be able to keep up with repayments should interest rates rise.
What is classified as income?
For the purposes of a serviceability assessment, the income used can vary from lender to lender, and might include:
- Salary and employment income (including from second jobs)
- Rental income
- Overtime
- Centrelink benefits (in particular Family Tax Benefits Parts A and B)
- Commission
Tip: Check with your lender to see what percentage of different income they’ll use to calculate your income. While most lenders include 100% of employment income, many lenders will consider up to 80% of rental property income. This means if you receive $500 each week, only $400 will be factored into your serviceability assessment.
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Contributor | Barry Saoud, General Manager, Mortgages and Commercial Lending
Barry joined Pepper Money in July 2021 as General Manager, Mortgages and Commercial Lending. He is responsible for the strategic direction and operating performance across product, credit, and settlements for mortgages, commercial loans, personal loans, and direct sales. Read more.
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