How do my expenses affect my serviceability?

One of the main factors banks and lenders consider when calculating your serviceability is your expenses. Here’s everything you need to know about how your expenses impact your serviceability.

What does serviceability mean?

Before we dive into the impact of your expenses, it’s worth understanding what mortgage serviceability actually is. When a bank or lender assesses your serviceability, they’re essentially reviewing your ability to make your mortgage repayments. Serviceability assessments are completed to minimise the bank’s risk when it comes to lending you money. As part of this assessment, the bank will take a good look at your income, your expenses and any other relevant factors.

These figures are used to generate your debt-service ratio (DSR), which is a measure of how much of your income goes towards servicing your loan or paying off your debt. Essentially, a higher DSR means you’re better off because it demonstrates that you’re in a good position to cover your repayments.

Every bank and lender has their own individual serviceability criteria. So just because one bank has qualified you for a home loan of a certain amount doesn’t mean that other banks will let you borrow the same amount.

More often than not banks and lenders will err on the side of caution when it comes to your maximum borrowing capacity. This is because they have to operate within the strict duty of care guidelines set by the Australian Securities and Investments Commission (ASIC) to ensure banks aren’t lending borrowers more than they can afford.

Expenses and your serviceability

Along with your income, banks and lenders also like to take a good, hard look at your expenses before offering you a home loan. Here are some of the expenses that your bank will consider when assessing your serviceability:

Living expenses

One of the main expenses that lenders consider is your day-to-day living costs. This includes costs such as groceries, utilities, transportation, and personal care. As a general rule, the higher your living expenses, the lower your disposable income for loan repayments.

Existing debt

If you have existing debts, like credit cards or other loans, these will affect your serviceability. Lenders take into account your current debt obligations when evaluating your ability to take on additional debt. Even if you’ve paid off your credit card balance, they’ll still use your maximum credit limit in their calculations.

Loan repayments

The proposed loan repayments themselves are a significant factor. Lenders assess whether you can comfortably meet the repayments based on your income and other financial commitments.

Interest rates

Higher interest rates can increase loan repayments. Lenders may assess your ability to service a loan not just at the current interest rate but also at a higher rate to account for potential future increases.

Income stability

Your income and its stability over time are crucial. Lenders prefer borrowers with a steady and reliable income. Irregular or variable income may impact your serviceability. In some cases, you might have to pay higher interest rates to account for the higher risk.

Financial commitments

Other financial commitments, like child support, school fees or insurance premiums, also come into play when evaluating serviceability.

How banks assess your expenses

If you think you can hide your expenses from the bank when it comes time to apply for a home loan, you’ve got another thing coming. Before lending you hundreds of thousands of dollars, the bank likes to make sure that you’re good for the repayments. They need to do their due diligence and meet their responsible lending obligations, so they’ll often use a few different methods to double- and triple-check that you’ll be able to afford to service your loan.

Here are some of the ways banks and lenders will check your expenses:

Household expenditure method (HEM)

The HEM is a benchmark used by banks and lenders to estimate your annual expenses based on the size of your household. They’ll compare this estimate with the average expenses for comparable households in a similar location. If your expenses are tracking much higher than the average, it can be seen as a red flag for the bank.

Self-assessment

During the loan application process you’ll also be asked to provide a self-assessment of your living expenses. Banks use multiple methods to determine you’re outgoings, so there’s not much point in underestimating your expenses. Self-assessments are usually very detailed, so you’ll often have to provide figures for:

• Rent
• Clothing/personal care
• Education
• Groceries
• Insurances
• Transport
• Utilities
• Subscription services
• Medical and healthcare
• Recreation and entertainment
• Gifts
• Expenses related to investment and residential properties

Review bank accounts

Banks and lenders will also review your bank accounts and financial statements to ensure that your self-assessment aligns with your actual outgoings. If you already bank with the lender you’re applying for a home loan through, they’ll already be able to see your account activity. Otherwise, you might have to provide statements or access to your accounts to show the last 3-6 months' worth of expenses.

How to improve your serviceability

If you’re planning on purchasing a property within the next 12 months, it can be a good idea to review your expenses yourself to see if there’s anything you can do now to cut your costs and improve your borrowing capacity.

Here are a few tips to help you increase your borrowing power:

Reduce your expenses

Spend some time assessing your expenses and cutting back on unnecessary costs.

Pay down your debt

Do your best to minimise any existing debt, or better yet, pay it off completely if you’re in a position to. This can include debt like personal loans and credit cards. You might even want to consider getting rid of any credit cards altogether if you’re planning on buying soon. Even if your balance is paid off, the bank will consider your maximum limit to cover themselves.

Tighten your belt

During the lead-up to purchasing a property, it’s a good idea to reign in your spending. Lenders will consider your spending habits in the few months before applying for a home loan, so try to practice responsible spending.

Review your credit score

It’s also a good idea to check your credit score to see how you’re tracking. The higher the number, the better your score. This indicates to lenders that you’ll make for a reliable customer.

Keen to calculate your borrowing power? Use our borrowing power calculator to work out how much you might be able to borrow when it comes to taking out a home loan with Unloan.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

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