Mortgage serviceability can feel like a frustrating hurdle to clear. But it’s an important safeguard against borrowing too much, particularly in the current interest rate landscape.

It’s in the best interests of all parties involved if your mortgage is chugging along with regular repayments being made. Borrowing an amount you don’t have a hope in hell of repaying can mean heartache for you, and can land your lender in hot water. Enter mortgage serviceability.

Before approving your loan application your Mobile Lender will take a good look at your finances to see if you can meet repayments.

We’ll break down just what to expect with a mortgage serviceability test, and how you can improve your chances of gaining home loan approval.

Our Lenders have a duty of care to ensure you’re not provided with a loan that’s beyond your means.

In fact, the National Consumer Credit Protection Act (2009) is in place to ensure lenders are following responsible lending practices (here’s that hot water we were talking about earlier).

While this protects Members from landing in financial dire straits, (which doesn’t have anything to do with getting money for nothin’, unfortunately) … it means that lenders are serious about checking serviceability, which can create some strict hoops for you to jump through.

Your serviceability is calculated by looking at your income and subtracting your expenses and debt repayments (including your new home loan repayment amount).

We then need to work out what portion of your monthly income can go toward repayments. This is called your debt service ratio. It’s also important to calculate your debt-to-income ratio, which is a measurement used to compare your total debt to your gross household income. Your credit card limit will also be taken into account and you may need to prove that you have the means to pay off the limit within three years, even if the balance is $0.

Finally, a serviceability buffer is applied to the current interest rate to see if you’ll be able to continue repayments should interest rates rise.  In 2021, the Australian Prudential Regulation Authority (APRA) raised the serviceability buffer from 2.5% to 3%. This buffer amount has been the topic of much discussion, with some arguing it’s making it tough for people to pass the assessment and refinance to a lower-rate loan. But APRA is remaining firm at 3% given the current state of interest rates.

Here are our top tips for increasing your serviceability score and improving your chances of home loan approval:

  • Pay down your debts to improve your debt-to-income ratio.
  • Reduce your expenses by cutting out non-essentials and looking for better deals on utilities.
  • Reduce your credit limits or cancel credit cards you’re not using, if appropriate.
  • Increase your income by starting a side hustle, asking for a raise, landing a higher-paying job, or even a second one (which we fully acknowledge is not possible for many families).

Other ways you can increase your chances of home loan approval:

  • Improve your credit score. Lenders will delve into your credit history to see if you’re good at making repayments.
  • Look at spending habits. Lavish overspending on non-essentials could raise a lender’s eyebrows.
  • Make savings. Showing that you can put away money on a regular basis will look good on your application.

Buying a home is an exciting prospect, but you don’t want to stretch yourself beyond your means. This is especially important given the recent RBA interest rate hikes over the past year.

“Our Dnister Mobile Lenders are here to help you crunch the numbers and find a loan that will work for you, not against you.”, said Dnister’s Lending and Member Services Executive, Ivanka Bernyk. “We have a range of competitive lending products designed to cater to our Members needs”, She added.

If you’d like to find out your borrowing power and what loan options are available, give us a call today.

 

Get in touch

Call Dnister today on 1800 353 041 and arrange to speak with a Lending Specialist or book an appointment online.

 

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. In providing you with this information you should consider the appropriateness of this advice with regard to your particular financial situation and needs. We advise that you carefully read our Home Loan Key Facts Sheet and TMD before acquiring a loan product. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent. Applications are subject to Dnister credit assessment criteria. Interest rates are subject to change without notice and should be verified with your local branch. Terms and conditions, including fees and charges, apply. For full details on our products and an analysis of your personal requirements, please arrange for an appointment with one of our friendly lending staff by contacting your local Dnister branch.