Serviceability – what is it and how do banks calculate it?


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Well…if you’ve been looking for a loan for your home or investment property, I’m sure you’d have come across the term “serviceability.”

When taking out a loan, the amount your bank will lend you will depend on a few things.

Along with your deposit they also look at your “serviceability.”

So what does serviceability mean, and why is it so important? Serviceability

Broadly defined, 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.

Most lenders set a maximum debt service ratio of between 30 and 35 percent.

At the end of last year there was talk about introducing new serviceability laws, which could mean potential borrowers have access to more funds.

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.

So, how is serviceability calculated?


When determining your ability to service a home loan, banks will take your after-tax income and subtract expenses and any other liabilities, such as credit card debt or money owed on another loan.

Banks will also add a buffer to your home loan interest rate to allow for any future interest rate hikes.

Before July 2019, lenders would use a minimum interest rate of at least 7%.

But with falling interest rates this was deemed needlessly high and was amended to better reflect the current interest rate environment.

Nowadays, lenders are advised to add a margin of at least 2.5% to a loan’s rate to assess your serviceability.

That means if you sign up for a $500,000 loan with an interest rate of 2.5% p.a., you’ll be assessed on your ability to pay off that same loan at a higher rate (around 5%.)

Your lender will look at your income can include regular salary, overtime, 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.

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

Lenders take into account rental income from investment properties when calculating serviceability.

However, most banks will only use 75% of rental income.

The reasoning for this is that there are costs associated with owning a rental property such as maintenance, management fees and re-letting fees when a tenant vacates.

If an investment property is rented at $1,200.00 per month, 75% of this rental income which is able to be used for serviceability is $900.00.

However, there are a few lenders whose credit policies will use 80, 90 or even 100% of rent.


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.

In the case of credit cards, most lenders will calculate a minimum repayment obligation of 2.5 – 3.0% of the approved credit limit. Centrelink benefits

The lender may require evidence of this debt in the form of account statements in order 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.

For example, if the account has a limit of $15,000, the minimum monthly repayment at 3% will be $450.

Having a $15,000 limit in place will reduce further borrowing capacity for a home loan by approximately $60,000.

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 canA line of creditcel unused cards to improve borrowing power.

Similarly, a line of credit will be taken into account 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 have also influences a loan application since there is a financial commitment involved in raising children or caring for other dependents.

Typically, each dependent will reduce the amount able to be borrowed by between $40,000 and $60,000.

Other factors

Whilst many property investors receive tax benefits if their loan is negatively geared, some lenders will not consider this when calculating serviceability.

In calculating repayments for a new loan, lenders will add a margin to the variable rate, to arrive at what is known as the ‘assessment rate’.

Today this margin is around 2.5% or more. APRA

In other words the banks want to know you could repay your debts if interest rates reach 7.5% or 8%.

To make things worse, they also calculate your repayments at the higher rate as if you have a Principal & Interest loan, even if you have an interest only loan.

Now you can see why it’s harder to get finance nowadays – you may have affordability but still not meet the bank’s more strict serviceability criteria.

APRA insists that lenders have a duty of care to ensure that a borrower can meet loan repayments.

Lenders’ serviceability calculators can produce quite different outcomes and so an experienced mortgage broker provides valuable assistance in helping to determine which lender is most suited to each individual circumstance.

The bottom line

When I sit down with clients at Metropole and help them formulate a strategic property plan to secure their future, I always involve a proficient finance strategists to guide them through the maze on the banks, finance and money.


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is a Property Strategist with an accounting background and over 30 years’ Commercial Banking experience. She is a passionate property investor who enjoys helping her clients create wealth through property investment using Metropole’s strategic approach.
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'Serviceability – what is it and how do banks calculate it?' have 12 comments

    Avatar for Rita Thomas

    September 19, 2018 Credit Mediation

    This is very specific thoughts. Well done, Thanks for the excellent outline and for sharing. Kinda helpful. Kudos!


    Avatar for Rita Thomas

    November 15, 2016 Bob

    Hi Michael,

    I’ve done my Assets & Liabilities, Income & Expenses and came up with my Net Income Surplus (NIS), which is about 50% of my income. Based on my NIS (which I’ve then assumed can be my monthly repayment), and with values for interest rate & LVR, I’ve come up with a Loan Value & Property Value.

    What’s your thoughts on the above? What I can I use it for and how should I use it for? Eg. persuade lender I can have a Debt Service ration of 50%? How about if I’m thinking of buying a property, subdivide and build a triplex? How does the construction component play with this model?

    Thanks in anticipation.


      November 15, 2016 Michael Yardney

      Bob – these sums are intersting, but basically irrelevant to the banks who have their own serviceability models that they run your income through – and these have become much stricter recently


    Avatar for Rita Thomas

    October 3, 2016 FX Daemon

    Hi Michael,
    If all my properties are cash flow positive to the extent that 80% of rent services 100% of loan interests, and if I keep acquiring such
    properties, will any lender stop lending to me eventually if the portfolio size gets too large?

    Is there anything else lenders will be reluctant to lend in this scenario?



      October 3, 2016 Michael Yardney

      FXD the problem with the scenario you paint is that it’s almost impossible to achieve as it’s too hard to save the deposit for the next property. Most people need the equity growth of their properties for the next deposit. You just can’t get that from cash flow properties


        Avatar for Rita Thomas

        October 4, 2016 FX Daemon

        Hi Michael,
        I agree but I am just talking about hypothetical scenarios here.
        Also, for baby boomers who bought few properties decades ago, the above may well be realistic with positive

        The main question remains if I have few cashflow positive properties, will my serviceability reduces with each
        additional new cashflow positive property I buy going forward ? 🙂



          October 4, 2016 Michael Yardney

          Currently the banks are penalising proeprty owners who are rent reliant – also some +ve cash flow property postcodes are not favoured by the banks


    Avatar for Rita Thomas

    June 28, 2015 bob logan

    So just come out of bankruptcy and have been totally discharged and married with 3 kids and am the only 1 working at the moment and annual income of $80000 before tax and the wife has family tax benefit a & b what would be a couple of my options?


      June 29, 2015 Michael Yardney

      It’s great to hear you’re ready to move on to the next stage of your life -now it’s time to save a deposit to make yourself attractive to the banks.
      And while you’re doing that educate yourself and become financially fluent.


      June 29, 2015 Michael Yardney

      Thanks for picking the typo Bob


    Avatar for Rita Thomas

    March 5, 2013 Ranji Whittle

    Two lenders said I don’t have serviceability, but the third lender approved my car loan application, how come?
    So every vendor calculates serviceability differently????
    I wait for your reply.
    Regards Ranji


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