There has been a misconception among home buyers that, as long as they have enough income to cover the interest payment and living expenses, they can get the loan. However, it is not just that simple for lenders to calculate your service ability! Trusted Finance hopes that this article will give you a deeper and broader insights of how lenders (i.e. bank) normally determine your borrowing capacity. A serviceability is often calculated basing on this formula:

Monthly surplus = Gross income – tax – existing commitments – new commitments – living expenses – buffer

What are the number we can put the above formula?

  1. Gross income: There are a number of income sources that banks will consider when calculating your gross income. These include:
  • Base income: All lenders accept all of your base income in their assessment. But it will be different depends on your employment status (full-time; part-time; casual; contractor; self-employed)
  • Overtime: Some banks will accept 100% of your overtime income if overtime can be shown to be a regular and ongoing. Other banks will only accept 50% of overtime income for assessment purposes.
  • Bonuses: Bonuses are often irregular and so lenders normally ask for a 2-year history or will not accept all of your bonus income.
  • Commission: Some lenders accept commission as a form of income if it has been received for at least one or two years. They are looking to see if your commission income is regular and ongoing.
  • Tax-free income: Family Tax Benefits A & B are normally accepted if your children are under 11 years of age. Other Centrelink income ((Parenting payment; Rental assistance; Veteran payment;…)) is assessed on a case-by-case basis.
  • Rent: Rent income from investment properties is an accepted form of income. Lenders typically use 80% of the rent income that you receive to allow for costs such as property management, repairs and council rates.
  1. Tax and Negative gearing benefits: You may notice that different lenders assess your tax expenses differently. However, most of lenders will consider negative gearing benefits when calculating your borrowing power and this reduces your tax expense. Of course, this just applies to an investor (who has investment property). The result of this is that the banks will allow investors to borrow more than home buyers. The assessment rate is higher for investors!


  1. New commitments: Other than the above items, notice that Lenders will assess the repayments of your new loan at a higher assessment rate, which is typically 2% to 3% above the actual interest rate that you will pay. This is to make sure that you have a buffer in case the RBA increases interest rates.

For example, for a $350k loan at rate of 3.09%, your declared monthly repayment is $1,492.

Under tighter serviceability rules, your bank may assess your borrowing power at principal and interest (P&I) at 6.25 % or even higher. So on that same loan amount, you would need to show a sufficient income to debt ratio to afford $2,155 per month – this is the assessed repayment).

  1. Existing commitments: including:
  • Existing Mortgages:Some lenders use the actual repayments for your loans whereas some use a higher assessment rate as above buffering.
  • Credit Cards:most of you wonder why the service ability reduces with credit cards? The answer is lenders use between 2% and 3% of the credit limit as a monthly repayment in their assessment regardless you do not use or paid off in full each month.
  • Personal Loans:Most lenders will use the actual personal loan repayments.
  • Living with parents: even you live freely with parents, lenders still take out $500-$650 per month for buffering in case you need to move out of home. A few lenders do not count this expense with confirmation letter from parents.
  1. Your living expenses: Most banks switched to the Household Expenditure Method (HEM). The banks will use the higher of either your declared living expenses or HEM for a household. Under HEM, a high expense for the first adult and child, and a lower expense for each additional adult and child in your family. So how does it work if you are applying for a mortgage without your spouse? The banks will still include your spouse’s living expenses in their assessment. This is to make sure that you can still support your family and afford to pay your new mortgage. If your spouse is working then some banks can consider leaving out your spouse’s living expenses. You will need to provide evidence of their income such as recent pay slips.
  2. The buffer: Despite calculating using lower income and higher expenses with higher than normal interest rate, some lenders also add in a non-existent expense known as a buffer to calculate your service ability.

Once the above mentioned expenses are deducted from your gross income then you are left with either a surplus or a shortfall.

Be careful, a surplus does not guarantee a loan approved! This just tells your borrowing capacity. Lenders needs to complete a full assessment including: Your credit history, LVR, credit score; genuine savings and employment to make the final decision. If you are a higher risk borrower then most lenders will need to see a higher surplus number. Example, you have surplus of $200 each month, but your employment status is casual less than 1 year, lenders might want to see your surplus of $500 per month.

In general, calculating the serviceability is quite complicated and different for different banks. However, if you are:

  • Not sure about your serviceability?
  • Not sure what documents you need to prepare for your loan serviceability?
  • Looking forward to having your loan application most likely to be approved?

With the experience and professional working manner, the Trusted Finance team is confident to be able to bring clients the most suitable bank options with the highest possible loan, with $ 0 AUD service fee!


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