Understanding Loan Serviceability: Why a Deposit isn’t Everything
Many prospective borrowers are surprised when their loan application is rejected despite having a substantial deposit saved. While a healthy deposit is important, banks are equally – if not more – concerned with your ability to service (repay) the loan. Here’s what you need to know about loan serviceability.
Start With a Mortgage Broker: Your Serviceability Guide
Before approaching banks directly, consider consulting a mortgage broker. They can:
- Calculate your borrowing capacity across multiple lenders
- Identify and address serviceability issues before they become roadblocks
- Access different lending criteria from various banks
- Provide strategies to improve your application strength
- Save you from multiple loan rejections that could impact your credit score
A good broker will assess your financial position through the eyes of various lenders, helping you understand exactly where you stand before submitting any applications.
What is Loan Serviceability?
Loan serviceability refers to your ability to make regular loan repayments without experiencing financial hardship. It’s a comprehensive assessment of your financial situation that goes well beyond just having a deposit.
Key Factors Affecting Serviceability
- Income
- Regular employment income
- Rental income
- Investment returns
- Government benefits
- Side hustle or additional income streams
- Living Expenses
- Rent or existing mortgage payments
- Utilities and household expenses
- Insurance premiums
- Transportation costs
- Food and groceries
- Entertainment and discretionary spending
- Existing Debts
- Credit card limits (even if unused)
- Personal loans
- Car loans
- Buy-now-pay-later commitments
- Other mortgage payments
- Future Considerations
- Interest rate buffers (typically 2-3% above current rates)
- Potential changes in income
- Future family plans
- Approaching retirement
- Property maintenance costs
Why Banks Focus on Serviceability
Banks prioritize serviceability because:
- It indicates sustainable loan repayment capacity
- It helps prevent mortgage stress
- It satisfies responsible lending obligations
- It reduces the risk of default
Common Misconceptions
“I have a 40% deposit, so I should easily get approved”
While a large deposit reduces the bank’s risk and improves your loan-to-value ratio (LVR), it doesn’t guarantee your ability to make ongoing repayments.
“My rent payments prove I can afford a mortgage”
Mortgage payments are just one part of property ownership costs. You’ll also need to cover rates, insurance, maintenance, and potential interest rate increases.
How to Improve Your Serviceability
- Reduce Existing Debts
- Pay down credit cards
- Close unused credit accounts
- Consolidate high-interest debts
- Increase Your Income
- Seek promotion opportunities
- Consider additional employment
- Develop new income streams
- Optimize Your Expenses
- Create a detailed budget
- Reduce discretionary spending
- Find better deals on utilities and insurance
- Clean Up Your Credit History
- Pay bills on time
- Address any defaults
- Maintain a good credit score
The Bottom Line
While having a substantial deposit is beneficial, loan serviceability is equally crucial in the loan approval process. Banks need to ensure you can comfortably manage repayments throughout the entire loan term, not just make the initial deposit.
Understanding serviceability requirements early in your home buying journey can help you better prepare for loan application success. Focus on both saving your deposit and optimizing your serviceability position for the best chance of approval.
Remember: A rejected loan application due to serviceability concerns isn’t necessarily a permanent “no” – it’s an opportunity to reassess your financial position and make improvements before trying again.
