Understanding Serviceability: Why Banks Say No

Understanding Serviceability: Why Banks Say No

When applying for a mortgage, many Australians find themselves puzzled when banks decline their application, often citing concerns over "serviceability." But what does this term actually mean, and why can it lead to a rejection? This blog post aims to unpack the concept of serviceability, its impact on mortgage applications, and what potential borrowers can do to improve their chances of approval.

What is Serviceability?

Serviceability refers to a borrower's ability to repay a loan based on their income, expenses, and other financial commitments. Lenders assess serviceability to determine whether a borrower can afford the repayments on a home loan without facing financial hardship.

#### Key Factors Influencing Serviceability

1. Income:

• Regular income from employment, investments, or other sources is crucial.
• Lenders typically look for stable, ongoing income.

2. Expenses:

• Regular outgoings, including living expenses, existing debts, and commitments (like personal loans or credit cards), are scrutinised.
• Banks may apply a "buffer" to your expenses, often estimating higher than your actual costs.

3. Loan Amount:

• The size of the loan you are applying for plays a significant role. Higher loan amounts require higher serviceability ratios.

4. Interest Rates:

• Lenders assess serviceability based on current interest rates, but also factor in potential rate rises.
• A common practice is to apply a stress test, which means calculating repayments at a higher interest rate than the one proposed.

5. Credit History:

• A good credit score can positively influence serviceability.
• Lenders will check your credit report for any missed payments or defaults.

Why Do Lenders Say No?

Even if you believe you can afford a mortgage, lenders may decline your application if they determine your serviceability isn't adequate. Here are some common reasons:

• **High Debt-to-Income Ratio**: If your existing debts consume a large portion of your income, lenders may consider you a high-risk borrower.
• **Insufficient Income**: If your income does not meet the lender's requirements, even with low expenses, your application may be rejected.
• **Variable Income**: If your income fluctuates significantly (e.g., through casual work or commissions), lenders may view it as less reliable.
• **Poor Credit History**: A history of late payments or defaults can seriously impact your serviceability assessment.

How to Improve Your Serviceability

Improving your serviceability is key to increasing your chances of mortgage approval. Here are some actionable steps to consider:

1. Increase Your Income:

• Consider taking on additional work or side gigs to supplement your income.
• If possible, seek promotions or opportunities for salary increases in your current job.

2. Reduce Your Expenses:

• Review your monthly budget and identify areas where you can cut back (e.g., subscriptions, dining out).
• Pay off high-interest debts to lower your overall debt load.

3. Improve Your Credit Score:

• Regularly check your credit report for errors and rectify any inaccuracies.
• Make timely payments on existing debts to bolster your credit history.

4. Consider a Larger Deposit:

• Putting down a larger deposit can reduce the loan amount you need and improve your serviceability ratio.

5. Consult a Mortgage Broker:

• A qualified mortgage broker can assess your situation and provide tailored advice on how to improve your serviceability and loan application.

FAQs

Q: How do lenders calculate my serviceability?

Lenders typically use a serviceability calculator that takes into account your income, expenses, existing debts, and the proposed loan amount. The result is then compared against the lender's serviceability benchmarks to determine if you may be eligible for the loan.

Conclusion

Understanding serviceability and the factors that contribute to it is essential for any Australian looking to secure a mortgage. By being proactive in managing your finances and seeking professional advice, you can enhance your chances of approval. Remember, each lender has different criteria, so what might be a barrier with one lender could be acceptable with another.

For personalised advice tailored to your financial situation, consider speaking with a mortgage broker. They can help navigate the complexities of serviceability and work with you to improve your application.

*Disclaimer: This blog post contains general information only and should not be considered financial advice. Always consult a qualified mortgage broker or financial advisor for personalised guidance.*