Serviceability

Serviceability is the banking industry's assessment of whether a borrower has enough income to service the proposed loan, including a margin of safety. Every Australian home loan application is assessed for serviceability; it's typically a harder test than the LVR requirement.

Lenders calculate serviceability using a "buffer rate": the actual interest rate plus a stress margin (historically around 3%, currently 3% under APRA's guidelines). So a loan at an actual rate of 6.2% is assessed at roughly 9.2%. The borrower's total income must be able to cover repayments at this stressed rate after accounting for other liabilities, household expenses (HEM or individual declaration), and a reasonable buffer.

For investment loans, lenders include a portion of rental income (usually 70-80%) in the borrower's assessable income, and include estimated holding costs as liabilities. They also use a higher assessment rate for existing investment loans when calculating total debt burden.

Serviceability is the primary reason buyers are turned down, and the primary constraint on portfolio building for investors. Strategies to improve serviceability include: reducing existing debt, using interest-only loans (lower monthly repayments, easier serviceability), increasing assessable income, and shopping between lenders (serviceability policies vary meaningfully).