Serviceability Assessment and Home Loan Applications

What is a Serviceability Assessment?

When you apply for a home loan, lenders don't just look at your deposit and property value. They conduct a comprehensive serviceability assessment to determine whether you can afford the loan amount you're requesting. This assessment examines your income, expenses, existing debts, and financial commitments to ensure you can comfortably manage your mortgage repayments.

For tech industry professionals, understanding serviceability is particularly important. Your income structure might include base salary, bonuses, equity compensation, and contractor arrangements - all of which affect how lenders calculate your borrowing capacity.

How Lenders Calculate Serviceability

Lenders use specific formulas and stress tests when calculating home loan repayments to determine how much you can borrow. The process involves several key components:

Income Assessment

• Base salary (typically 100% included)
• Bonuses and commissions (often 50-80% included, depending on consistency)
• Rental income from investment properties (usually 80% after expenses)
• Contractor or freelance income (requires at least 12-24 months of history)
• Overtime and allowances (varies by lender)

Expense Analysis

Lenders scrutinise your monthly expenses, including:

• Existing home loan or rent payments
• Credit card limits (not just balances)
• Personal loans and car loans
• HECS-HELP debt repayments
• Living expenses (based on Household Expenditure Measure or declared expenses)
• Dependant costs

Most lenders also apply a buffer to the current home loan interest rate - typically 3% above the actual rate - to ensure you could still afford repayments if interest rates rise.

Understanding Your Borrowing Capacity

Your borrowing capacity is the maximum loan amount a lender will approve based on your serviceability assessment. Several factors can improve your borrowing capacity:

1. Reducing existing debts before you apply for a home loan
2. Lowering credit card limits (even if you don't use them)
3. Paying off personal loans or car loans
4. Demonstrating consistent income over time
5. Minimising discretionary spending in the months before application

For those in the tech industry, fluctuating income from equity or bonuses can complicate calculations. Working with a broker who understands tech compensation structures ensures you access home loan options from banks and lenders across Australia that assess your income favourably.

Loan to Value Ratio and Serviceability

The loan to value ratio (LVR) represents the loan amount as a percentage of the property's value. While LVR affects whether you'll pay Lenders Mortgage Insurance (LMI), it also influences serviceability requirements.

A higher LVR means:

• More stringent serviceability requirements
• Higher interest rates in some cases
• Potential LMI premiums (usually above 80% LVR)

Tech industry workers may qualify for LMI waivers with certain lenders, which can significantly reduce upfront costs while maintaining acceptable LVR levels.

Home Loan Products and Serviceability

Different home loan products affect your serviceability calculation differently:

Principal and Interest Loans
These standard loans require you to repay both the principal and interest each month. Lenders generally view these favourably for serviceability as they build equity steadily.

Interest Only Loans
Interest only loans have lower initial repayments, but lenders still assess your ability to make principal and interest repayments. The serviceability test uses the higher principal and interest payment, not the interest only amount.

Variable Rate vs Fixed Rate
Whether you choose a variable interest rate or fixed interest rate affects your repayments, but lenders still apply the buffer rate to your assessment. A split loan combining both can offer flexibility while managing interest rate risk.

Home Loan Features That Support Serviceability

Certain home loan features can help you manage repayments and build equity:

Offset Account
A linked offset account allows your savings to offset your loan balance, reducing interest charged. This doesn't directly affect your initial serviceability assessment but helps you manage repayments more efficiently.

Portable Loan
A portable loan lets you transfer your existing home loan to a new property without reapplying. This can be valuable when upgrading homes while maintaining your current interest rate and loan terms.

Redraw Facilities
Making additional repayments that you can redraw provides flexibility without affecting your core serviceability assessment.

Getting Home Loan Pre-Approval

Home Loan pre-approval gives you confidence about your borrowing capacity before you start property hunting. During pre-approval, lenders conduct a full serviceability assessment based on your current financial position.

Pre-approval typically lasts 3-6 months and allows you to:

• Understand exactly how much you can borrow
• Shop for properties within your budget
• Negotiate with vendors from a position of strength
• Identify any issues with your application early

For those buying your first home, pre-approval is particularly valuable in understanding what's achievable and what steps might improve your borrowing capacity.

Maximising Your Serviceability Assessment

Tech industry professionals can take specific steps to optimise their serviceability:

Document Your Income Thoroughly
Gather payslips, tax returns, employment contracts, and bonus letters. For equity compensation, provide vesting schedules and historical patterns.

Manage Your Credit Profile
Check your credit report for errors, avoid multiple credit applications before applying for your home loan, and maintain low credit utilisation ratios.

Time Your Application Strategically
Apply after receiving bonuses or when your income documentation is strongest. If you're transitioning roles, timing can significantly impact how lenders assess your application.

Consider Multiple Lenders
Different lenders have varying serviceability policies. Some specialise in mortgages for tech industry workers and understand complex compensation structures better than others.

Working with Specialist Brokers

A mortgage broker specialising in tech industry applications understands the nuances of your income structure and can compare rates across multiple lenders to find home loan packages that suit your situation.

They can help you:

• Navigate complex serviceability requirements
• Access lower rates through professional packages
• Structure your application to maximise borrowing capacity
• Understand how your specific circumstances affect different lenders' assessments

Whether you're after an owner occupied home loan or looking to invest in property for financial stability, understanding serviceability ensures you're well-prepared for your home loan application.

Home loan refinancing also involves serviceability reassessment, so maintaining a strong financial profile benefits you throughout your home ownership journey.

Understanding how lenders assess your ability to repay helps you achieve home ownership and secure your future with confidence. By preparing your finances, documenting your income properly, and working with professionals who understand tech industry compensation, you'll be well-positioned to access home loan options that support your goals.

Call one of our team or book an appointment at a time that works for you to discuss your serviceability and explore the home loan products available to tech industry professionals.