You may have a deposit saved and be prepared to start house hunting with a particular budget in mind, but before you start looking for your dream home (or your starter home), you need to understand home loan serviceability and how it will affect your loan application.
What is home loan serviceability?
When you apply for a home loan, your potential lender needs to figure out whether or not you will be able to pay it back.
As part of the application process, you will be expected to submit details of your income, assets, savings, debts, liabilities and regular expenses. Once the lender has this information, it will calculate whether you can service/pay back the home loan.
To put it another way, your home loan serviceability is the amount that your lender believes you can comfortably repay.
The person in charge of reviewing your mortgage application will calculate serviceability by taking your after-tax income, subtracting your expenses and taking your debts/liabilities into account. They will also add a buffer to confirm you won’t default on your payments if interest rates rise.
The lender will also calculate your debt service ratio (DSR), which is the percentage of your monthly salary you can afford to put towards your home loan.
How to increase home loan serviceability
The bank will lend you as much money as it believes you can afford to pay back. However, there are things you can do to nudge the numbers in the right direction.
Before you apply for a home loan, see if you can take steps to achieve the following:
1. Reduce debt
The less debt you have, the higher your home loan serviceability will be. Clear as much debt as you can. This will make room for the home loan costs in your budget. It also proves to the bank/lender that you can make repayments in a reliable way. If you can’t take care of all your debts in full, consider consolidating them into a single, more manageable loan.
2. Increase your income
The more you earn, the more you can borrow. Of course, earning more money isn’t always a matter of clicking your fingers, but any legal way that you can find to increase your earnings, from side hustles to casual hospitality shifts, will help increase your home loan serviceability. As you prepare to take on a home loan, consider how you can put yourself in line for a promotion at work or find a job that has a higher salary.
3. Reduce your expenses
Do you really need subscriptions to five streaming services? Do you need to eat out every week? Can you cut some luxuries out of your weekly grocery shop? The lender will look at your bank statements, so it will help if you can show you’re in control of your spending. Make a plan to keep your spending to a minimum for three months before you submit your loan application and find a way to be disciplined.
4. Lower your credit limits
Your lender will review your minimum monthly repayments on your credit cards. Obviously, the higher the limit on the credit card, the higher the repayments will potentially be, even if they are not maxed out when you apply for your loan. Lowering your credit limits gives a more favourable impression.
5. Think about kids
Obviously, having children isn’t something you can change. However, children are a financial liability. If you can plan your home loan application before you start your family or add to it, you may find it easier to get approval.
6. Borrow from the ‘Bank of Mum and Dad’
Your lender will look closely at your budget, but if you have a cash contribution from your parents (we appreciate this isn’t possible for everyone), you won’t need to borrow as much, which will make servicing your loan easier.
Get help to figure out your home loan serviceability
Property is at the heart of prosperity, but getting your foot on the ladder can take time. Before you apply for a loan, it helps to be prepared so you can prove your suitability as a borrower.
Landen’s experienced Mortgage Brokers can help you start or continue your home ownership journey. Contact us to find out more.