How Is Serviceability Calculated?
Loan serviceability is a lender's assessment of whether you can comfortably afford ongoing loan repayments based on your income, living expenses, and existing debts.
What is loan serviceability?
Loan serviceability is an assessment conducted by Australian lenders to determine whether you have sufficient surplus income to comfortably meet ongoing loan repayments. Instead of looking solely at your deposit or equity, lenders evaluate your net income alongside your total household obligations to ensure borrowing does not cause financial hardship.
When calculating serviceability, lenders verify your PAYG salary, bonuses, or secondary income, then subtract tax and living expenses. They review your declared household budget or apply the Household Expenditure Measure (HEM) benchmark, whichever is higher. Existing liabilities, such as credit card limits and personal loans, are also factored in based on maximum monthly obligations.
Crucially, banks do not just assess your ability to repay a loan at current interest rates. Under guidelines set by Australian regulators, lenders apply an interest rate serviceability buffer—typically around 3.0% above the actual product rate—to stress-test your household budget against potential future rate rises or economic changes.
Because each Australian bank calculates living expenses, income shading, and serviceability buffers slightly differently, your borrowing capacity can vary significantly across institutions. A Lonix broker can compare options across multiple lenders and structure your loan application effectively to suit your specific financial situation.
Related questions
- What is the Household Expenditure Measure (HEM)?
- HEM is an Australian statistical benchmark used by lenders to estimate a household's baseline living expenses based on income and family size.
- Why do lenders assess credit card limits instead of balances?
- Lenders evaluate credit cards based on their maximum approved limit because you could potentially draw down the full amount, increasing your ongoing financial commitments.
- How does the APRA serviceability buffer affect borrowing power?
- The serviceability buffer tests your ability to repay a loan at a higher interest rate, which reduces the total amount a lender will allow you to borrow.
- Can overtime and bonuses be included in serviceability calculations?
- Yes, but lenders frequently shade variable income by discounting it to around 80% to account for potential fluctuations in your earnings.