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Serviceability is the ability of a borrower to meet loan repayments, based upon the loan amount, the borrower’s income, expenses and other commitments.

This generates an overall figure, known as the debt service ratio – a borrower’s monthly debt expenses as a proportion of monthly income.

Having a basic knowledge of how serviceability is calculated can help people to understand and, if necessary, rework their finances in preparation for obtaining a loan for the purchase of owner-occupied or investment property.

Especially in today’s more difficult lending environment.


How is serviceability calculated?


Income can include regular salary, overtime, a fully-maintained company car, shift allowance, bonuses and commissions.

In some industries such as police, fire services and nursing, overtime is an integral part of income and is considered in full for serviceability purposes.

For other professions, a reduced proportion of overtime income is used.


In these cases, the lender acknowledges that the borrower has in fact been paid all of the overtime, but will only apply a reduced amount in calculating serviceability because there is no guarantee that the borrower will continue to earn overtime at the same level if market or employment conditions change.

If an applicant has a second job, the income from it will only be considered if the job has been held continuously for at least one year.

Centrelink Family Tax Benefit Parts A and B are considered in most cases where the children are under the age of eleven.



On the other side of the equation are liabilities.

Existing debt or potential debt (by way of credit cards or lines of credit that are already in place) will lower the amount which is able to be borrowed for a new loan.

The lender may require evidence of this debt in the form of account to confirm monthly repayments.

This applies if there is a balance owing and even where there is a nil balance.

The reasoning for this is that the credit can be accessed to its limit at any time.

Given the significant impact that credit cards can have on applications for new loans, it is advisable to reduce the credit limit(s) to an absolute minimum and cancel unused cards to improve borrowing power.

Similarly, a line of credit will be taken as if it were fully drawn down, even if it isn’t.

In addition, commitments to repaying a car loan, personal loan, HECS and rent will affect home loan borrowing capacity.

The number of dependents a person or couple may also influence a loan application since there is a financial commitment involved in raising children or caring for other dependents.