To recap, your mortgage serviceability or home loan serviceability is the calculation the bank uses to determine whether you can make a payment on your loan after all of your income and expenses have been taken into consideration. Banks will not accept a mortgage application if it looks like you will struggle to make regular home loan repayments and they take the subject of mortgage serviceability very seriously.
For those individuals looking to apply for a mortgage, your home loan serviceability is an essential factor as buying a home is no small feat. On average it takes over nine years for a person or persons to save for the 20% down payment required to get a mortgage. And then once you have the mortgage, the national average states that 36.3% of gross household income is required to meet the needs of an 80% loan to value ratio mortgage – down from 51% more than ten years ago. It is indeed all in the numbers.
The property market can be changeable from year to year – even quarter to quarter – as the statistics show. Sometimes it is a buyer’s market; other times the market favours the homeowners. Lately, the statistics have shown a rise in first home buyer activity in Australia. Perhaps this is due to the fact that national dwelling prices have fallen by 0.3% (from 6.84 times the average household income down to 6.81), down by 2.2% since peaking in September of 2017. It is interesting to note, however, that with the rise of activity from first home purchasers and a reduction in national home prices, there has been no accompanying reduction in the proportion of income required to service a mortgage.
What is also surprising is that overall lending activity has dropped by 3.8% even though first home buyers have increased by an astounding 20.6%. The rise saw the figures catapult in Victoria and NSW, in particular, 31.7% and 25.5% respectively.
While income proportion to home loan may have not changed recently, mortgage serviceability on the whole, has become stricter. While it used to be a relatively easy process to move from a principal and interest loan to an interest-only loan, the requirements to undergo a serviceability assessment are now stricter than ever. If you intend to look at a new loan, then it is important to have your financials in order otherwise you may be limited to your current mortgage plan.
Borrowers are required to give extensive details regarding their living expenses and lenders are now watching these said expenses closer than ever. At least three months of bank and credit card transactions will be required to accompany a loan exchange. Discretionary expenses may come into question as will one-off payments and costs which are seemingly out of the norm. Knowing that your expenses over a three month period will be investigated with a fine tooth comb, then it is important to make sure that nothing out of the ordinary occurs during this spend period. This will ensure that refinancing or an initial mortgage application will run smoother and will in all likelihood come out more in your favour. Consider deferring any big spends until after your loan is approved so it will not adversely affect your chances for success.
Of course, don’t forget that a more substantial deposit (over 20%) will enable you to apply for a larger home loan. On the whole, however, it does pay to be mindful of your spending habits regardless of how much deposit you have available.
Aiming to decrease your expenses, reduce your liabilities and increase your income are surefire ways to improve your mortgage serviceability power. While you will can never by 100% sure of the exact calculations a lender uses to come up with the final number, this strategy will go a long way in aiding your cause.