What is serviceability?
Serviceability is a lender's assessment of a borrower's ability to meet loan repayments based on their income, expenses, debts, and a buffer rate applied to interest rates.
Lenders use serviceability to determine whether you can afford a home loan. It is the core measure that shapes how much a bank or financial institution will lend you in Perth or elsewhere.
The assessment looks at several key factors:
- Income: Your gross annual earnings from employment, investments, or other sources.
- Expenses: Regular outgoings including utilities, groceries, insurance, and childcare.
- Existing debts: Credit cards, car loans, personal loans, and other financial commitments.
- Buffer rate: A stress test applied above the current interest rate (typically 2-3 percentage points higher) to ensure you could still repay if rates rise.
Serviceability is not simply income minus expenses. Lenders apply the buffer rate to your loan amount to simulate repayment capacity under higher rate conditions. This protects both you and the lender from the risk of future rate increases. If your serviceability is too tight, a lender may reject your application or offer a smaller loan amount than you expected.
When working with a mortgage broker, understanding your serviceability upfront helps you know what you can realistically borrow and which lenders are most likely to approve your application.