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Home Loan Variable: 5.20% (5.24%*) • Home Loan Fixed: 5.48% (6.24%*) • Fixed: 5.48% (6.24%*) • Variable: 5.20% (5.24%*) • Investment IO: 5.78% (6.81%*) • Investment PI: 5.58% (6.62%*)

What is Meant by “Serviceability”, and How is it Calculated?

When you apply for a home loan, a lender will take a large number of factors into consideration when deciding whether or not to approve your application. The Serviceability assessment determines if you can comfortably “service” the loan repayments after considering all of your income, expenses and liabilities.

Each lender has its own risk assessment standards that are used in order to determine serviceability, so no one calculator can be relied upon for an accurate indication of your borrowing power. Our website calculator is one that takes a reasonably conservative approach to borrowing and cannot be relied upon an being accurate; we conduct various serviceability calculations by measuring your obligations and circumstances against each individual lender.

and different criteria when it comes to the serviceability standards they will accept. This means that one bank might approve you for a set amount, and a different bank could approve you for a higher or lower value. Banks don’t often make their exact serviceability standards public, but they do tend to calculate serviceability in a similar way.

Calculating Serviceability

In general terms, lenders calculate serviceability by adding together your income from all sources, subtracting your expenses and debt liabilities, and then adding in the required monthly mortgage payment.

Net Service Ratio: Net Service Ratio (NSR) is a standard measure. NSR measures your after-tax ability to service additional debt after allowing for existing debts and living expenses. The fomulae applied with the NSR is commonly used by the majority of lenders. To calculate the Net Service Ratio, after-tax income is added up, incorporating any rental income. Then the proposed loan is deducted. Also deducted are your existing financial commitments, including other mortgages, credit card liabilities (usually calculated at 3%-4% of the monthly card balance), and finally your living expenses (non-financial) are calculated. The proposed loan and your existing mortgages are usually calculated at a test rate, which is higher than the current rate.
Household Expenditure Measure: The Household Expenditure Measure (HEM) is often used to assess your expected general living expenses although many banks are now moving towards real-time bank statement assessment for an accurate and personal understanding of your spending and lifestyle habits. Expenses like entertainment, groceries, utility bills, subscriptions and insurance premiums are collated as a measure of whether you’re prone to spending above your means.


Your income can come from numerous sources, such as:

  • Salary and wages
  • Rental property income
  • Investments and dividends
  • Centrelink benefits
  • Self-employed income

Not all types of lenders will consider all types of income. Such considerations include the following:

  • Rental Income. Since rental (investment) properties can go untenanted for long periods of time, most lenders will accept 75% – 80% of your gross rental income source, although this varies from lender to lender.
  • Income from Shares. The share market is volatile and unpredictable. Most lenders will accept 80% of investment income in their assessment of total income, although this varies from lender to lender.
  • Overtime. Some lenders will not consider overtime in their assessment, while others might apply a requirement to prove the overtime consistency over a period of time. In some industries, such as the health industry or police services, this is an integral part of income, and most banks recognise this income norm.
  • Government benefits. Some lenders may not consider Government benefits.
  • Secondary Employment. In most cases, a lender will consider secondary employment if the job has been held continuously for at least one year.

As a general rule, and as a result of an investigation by an APRA survey, it was not uncommon to find the most generous Authorised Deposit Institution (ADI) was prepared to lend 50 per cent more than the most conservative. This varied more broadly with investing lending. In summary, APRA found that most lenders would generally lend 5x to 6.5x your gross income.

Credit Cards

Existing debt plays its part when assessing your borrowing capacity and serviceability, and this includes inactive credit cards. Lenders will usually assess your borrowing capacity by calculating 3% – 4% of your credit limit (for example, if the account has a limit of $15,000, the minimum monthly repayment at 3% will be $450, thus reducing your borrowing capacity for a home loan by approximately $60,000). One of the most basic steps you can take to improve upon serviceability is to close inactive cards and pay existing credit card debt – this greatly improves upon your borrowing power.

Interest Rate Buffer

Our Serviceability Calculator provides numerous graphs where you’re able to measure repayments based on an increasing interest rate. In the same way you might add a margin or buffer to assess serviceability at a higher rate, banks will do the same to the value of around 2% – 3% (usually 2.5%, as recommended the Australian Prudential Regulation Authority, or APRA). Before July 2019 many banks were using 7% which severely limited the borrowing power of consumers.

What this buffer means that if you’re considering a product with an interest rate of 2.5% you can expect the banks to evaluate your serviceability as if the rate was set to at least 5% (in some cases this will be higher).

Affordability Versus Serviceability

Affordability is a consumer consideration, and serviceability is a bank assessment criteria. The interest rate buffer, the HEM index applied to your living expenses, and other considerations are designed to err on the side of caution to satisfy the lender’s risk assessment, so the figure that they determine as one you can service is normally lower than a loan you can actually afford.

A Consultation is Necessary

Lenders vary enormously in their borrowing risk assessments, so it’s important to talk to us about our options. Each borrower has a specific set of circumstances that tends to match up against limited products. Call us anytime or make an appointment and we’ll have a no-obligation discussion.

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