In this article:
If one thing’s clear, 2025 is going to be an interesting year for the property market. With the forecast changes to the cash rate, and the consequent shifts in loan rates and accessibility, there are going to be many challenges and opportunities for the prospective borrower – whether you’re looking to buy your first home, refinance or build your property investments.
One constant remains in being able successfully negotiate Australia’s property market: knowing your borrowing capacity.
Lenders determine this by looking at your “loan serviceability.”
According to the ANZ/CoreLogic Housing Affordability Report, loan serviceability in Australia deteriorated in 2024 due to high interest rates, rising home values and the impact of taxes and cost of living pressures on household incomes.
This means lenders will be heavily scrutinising your finances before giving the green light to your property goals this year.
What is Loan Serviceability?
At its core, loan serviceability is a measure of your ability to repay a loan over time.
Lenders use this calculation to determine how much money they are willing to lend you based on your income, living expenses, debts, and other factors. They assess your ability to meet repayment obligations under current and potential interest rate conditions. This is what makes it such a big deal for borrowers as we negotiate the predicted changes in the interest rates across 2025.
Your loan serviceability hinges on two things:
- Income: How much money you earn (e.g. salary, rental income, or other sources).
- Expenses: How much you currently spend on living costs, existing debts, and financial commitments.
Think of it as a financial balancing act; lenders want to be confident that your income outweighs your expenses with room to comfortably cover loan repayments.
The Key Factors That Impact How Much You Can Borrow
Several factors influence your loan serviceability, including:
1. Your Monthly Income Your salary or wages are one of the strongest determinants of how much you can borrow. However, lenders include other income sources like rental payments, bonuses, or dividends when calculating serviceability. The higher your income, the better your capacity to service a loan.
2. Living Expenses: Next, lenders look at your spending habits. This includes your monthly utility bills, groceries, transport costs, and even your subscription services. Be prepared for a deep-dive into how much you spend versus save each month.
3. Outstanding Debts: Credit card balances, car loans, and personal loans could dent your serviceability significantly. Even unused credit card limits may weigh against you, as lenders factor in your potential liability.
4. Interest Rate Buffers: Most lenders assess your serviceability using a higher-than-current interest rate to ensure you can manage repayments should interest rates rise. This is called a “stress test” and may impact your maximum borrowing capacity.
5. Loan Term: The duration of your loan also affects serviceability. A longer loan term generally results in lower monthly repayments, improving serviceability. However, shorter loan terms reduce the amount of interest paid over the life of the loan.
6. Deposits and LVR: Loan-to-Value Ratio (LVR) is the percentage of your loan compared to the value of the property. Borrowing more than 80% of the property’s value usually requires Lenders Mortgage Insurance (LMI), which can affect your serviceability calculation.
7. Other Factors: If you’re buying property for investment, lenders might account for potential rental income. Additionally, your age and dependents may influence their assessment, for example, fewer dependents usually indicates you have more funds for repayments.
The “Buffer”
To calculate your loan serviceability, you can add up your income, subtract your expenses and debts, and then add your proposed monthly mortgage payment. Different lenders may use different methods to calculate serviceability, so you may get different results depending on which lender you choose but, overall, the process is similar across lenders.
A crucial component of applying for a home loan is what’s commonly known as the serviceability buffer.
This is often missed by borrowers new to the property market and can come as a shock.
The 3% serviceability buffer is a minimum interest rate that lenders add to a home loan when assessing a borrower’s ability to repay the loan.
In other words, if the mortgage you are interested in has a 6.3% interest rate, the lender would calculate your ability to afford repayments at a rate of 9.3%.
This buffer makes a big difference to your initial calculations but it is a requirement that lenders apply this buffer when assessing your serviceability.
While the buffer can make it difficult for first-home buyers and those looking to refinance, especially with rates relatively high at the moment, it is intended to protect borrowers from taking on too much debt and becoming unable to make repayments due to possible changes in interest rates, income, or expenses in the future.
Why Loan Serviceability Matters in 2025
Understanding your loan serviceability not only helps you gauge how much you’re able to borrow but also ensures that you only take on what you can realistically afford.
Taking the time to understand your loan serviceability and aligning your finances with lender expectations will provide a clear insight into your financial potential and a logical foundation for making informed decisions in a difficult property market.
By understanding the factors that impact it and making a few proactive changes, you’ll be well on your way to securing the right loan for your dream home or refinancing goals.
Reach out today and take control of your borrowing power!
