A serviceability assessment is among the most crucial stages in the process of applying for a loan. Here’s how an applicant may be assessed on their ability to service a loan according to their income, expenses and other factors.
A serviceability assessment occurs prior to a credit check following an application for a loan. A number of diverse factors go into the process of assessing serviceability, covering both the nature of the loan itself and the individual’s specific circumstances.
Importantly, serviceability is something that a prospective loan applicant can take steps to improve.
What is serviceability?
In simple terms, ‘serviceability’ refers to the ability of someone to make repayments on a loan, according to the size of the loan and the person’s income and expenses. The factors that define serviceability vary between financial institutions. Lenders such as Pepper Money can use both a serviceability calculation as well as the debt service ratio to determine how desirable a borrower may be.
A serviceability calculation is derived by taking a borrower’s income, less expenses, household expenditure, and the new loan repayment. Debt service ratio represents the proportion of the applicant’s income that can go toward paying off a loan. The maximum debt service ratio typically ranges between 70 and 90 per cent.
It is helpful for anyone seeking to take out a loan to have a solid grasp of exactly what serviceability is, and apply it carefully and realistically to their own circumstances.
What is a serviceability assessment?
A serviceability assessment is the process of considering all the variable factors contributing to an individual’s overall financial situation in order to determine serviceability and debt service ratio.
Typically, an individual’s income is balanced against expenses, liabilities and other expenditures. Liabilities might include credit cards and other loans, while an individual’s serviceability may also be affected if they have children or dependents.
A further point about the assessment of serviceability is that lenders may add a buffer to the assessment rate in order to ensure the applicant will be able to keep up with repayments should interest rates rise.
What is classified as income?
For the purposes of a serviceability assessment, income might include:
- Salary and employment income (including from second jobs)
- Rental income
- Centrelink benefits (in particular Family Tax Benefits Parts A and B)
The degree to which each of these can affect a person’s serviceability assessment will vary from case to case. For example, those who are employed in the police, fire service or health sector rely on overtime as an important source of income, yet how much overtime income they receive naturally fluctuates from week to week. Some lenders may consider overtime income in full for people in these professions when assessing serviceability.
For those in other industries, lenders may factor in a reduced portion of their overtime income when assessing serviceability, to reflect the fact that overtime is not consistent and work conditions may change.
With rental income, a lender may choose to use just a percentage of this when calculating the applicant’s serviceability to take into account the expenses incurred when owning a rental property.
This article provides you with factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. Neither Pepper nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in this article. For information about whether a Pepper loan may be suitable for you, call Pepper on 13 73 77 or speak to an accredited Pepper Money broker.
All applications are subject to the credit provider’s credit assessment and loan eligibility criteria. Terms, conditions, fees and charges apply. Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
©Pepper Money Limited ABN 55 094 317 665; AFSL 286655; Australian Credit Licence 286655 (“Pepper”). All rights reserved. Pepper is the servicer of home loans provided by Pepper Finance Corporation Limited ABN 51 094 317 647. Pepper Asset Finance Pty Limited ACN 165 183 317 Australian Credit Licence 458899 is the credit provider for asset finance loans.