Loan Serviceability

[roosterfan]

Hi Guys,

I was wondering if there is any rule-of-thumb that I can use for increasing my debt serviceability? For instance, if am able to pull in another $1000 in income, does this relate to a certain amount that a normal bank will lend me. Same with say an extra $10 a week rent, does this equate to an extra lend of …?

I am assuming its something like 5 times income, but was wondering if rent and salary are treated differently? My serviceability is tight for my next property, so trying to get an idea of how much rent I should be looking for…

Cheers
Roosterfan

 

[LynnH]

roosterfan

This one came from a previous member of the forum (a mortgage broker) several years ago - I wrote it down then and have been using it ever since.

Quick way to calculate borrowing capacity:

(Income x 40%) divided by 7 x 100%

Every financial institution will have its own unique, complicated and 'secret' way of calculating serviceability, but this should give you an idea of whether you are in the 'ball park'.

Cheers
LynnH

 

[roosterfan]

Thats what I was after, thanks LynnH!

 

[Bradsdad]

Back in the 80's and early 90's (could go back further but I wasn't in banking/finance B4 that) it was 25% for individuals & 30% for couples. This went by the wayside as it was clearly unfair to compare someones ability to meet credit commitments on $30k p.a to that of someone on $100k. In this scenario the person on $30k would be able to have credit commitments of $7,500 p.a (or $22,500 for everything else) and the person on $100k would be allowed $25k ($75k for everything else). Even allowing for a more expensive lifestyle the person on $100k was being limited.

You will find that there is not set rule now and that even if there was it would be changing frequently in today's market. Things such as interest rate rises will affect how much you can borrow and most lenders have recently increased their minimum allowance for general living expenses due to an increase in the Henderson Poverty index. Each time these things change any calculation/ratio would alter. I just had clients come back to me who I had given a ballpark figure of how much they could look at borrowing (I say ballpark as the lender makes the final decision) 2 months ago. This figure has since changed as the lender had their own 0.20% increase (this impacted on current debts also) and their general living expenses increased by approx $180 for a couple.
I would suggest you continually check on your borrowing capacity as although you will see/hear when lenders increase rates you won't hear about any policy changes in the media.



Regards
Steve

 

[Rolf Latham]

Hiya Steve

There sometimes seems to be wisdom in the old days though.

While Someone on 100 000 vs 30 000 a year are going to have "similar" power bills, the 100 k income doesnt necc mean more disposable income.

I call it Latham's Law, though Im sure Im not the first to find it.

I used to earn 12 000 a year, and my living expenses were x

I know earn a bit more than that and my living expenses are x mulitplied by the more money I earn, in other words, in % terms my housing/mortgage income is no higher, so my real % capacity to pay for mortgages is no higher.

Anyone with me here ?


ta
rof

 

[super_sam]

Hiya Steve

There sometimes seems to be wisdom in the old days though.

While Someone on 100 000 vs 30 000 a year are going to have "similar" power bills, the 100 k income doesnt necc mean more disposable income.

I call it Latham's Law, though Im sure Im not the first to find it.

I used to earn 12 000 a year, and my living expenses were x

I know earn a bit more than that and my living expenses are x mulitplied by the more money I earn, in other words, in % terms my housing/mortgage income is no higher, so my real % capacity to pay for mortgages is no higher.

Anyone with me here ?


ta
rof

In other words the more you make the more it costs

 

[HiEquity]

Anyone with me here ?

Hi Rolf

I have heard this before and have seen it around me quite a bit. Lifestyle expenditure as a general rule does seem to go up with income.

But it doesn't have to be this way. If I had to hazard a guess I would say our personal expenditure wouldn't have gone up to 150% of what it was in the time our income has gone up to 300% of what it was.

And that's after having two kids in the meantime! Mind you the kids keep us from going out so there are some cross-elasticities there...

 

[Bradsdad]

Hi Rolf

I have heard this before and have seen it around me quite a bit. Lifestyle expenditure as a general rule does seem to go up with income.

But it doesn't have to be this way. If I had to hazard a guess I would say our personal expenditure wouldn't have gone up to 150% of what it was in the time our income has gone up to 300% of what it was.

And that's after having two kids in the meantime! Mind you the kids keep us from going out so there are some cross-elasticities there...

I find you're even expected to cloth & school the lil rugrats also. Next they'll ask to be fed

 

[skuzy]

In other words the more you make the more it costs

i remember my uni economics lecturer saying 'the more u earn, the more you spend' (on crap)...

 

[Springtime]

roosterfan

This one came from a previous member of the forum (a mortgage broker) several years ago - I wrote it down then and have been using it ever since.

Quick way to calculate borrowing capacity:

(Income x 40%) divided by 7 x 100%


Cheers
LynnH

So whats that? .057 * income?

 

[Shaun M Smith]

Serviceability

I would expect the (Income x 40%)/7 x 100 may be give a result that is a little high in the current environment. It may have perhaps worked when interest rates were somewhat lower and therefore the assessment rate dramatically lower.

The above suggests you times income by approximately 5.7 times. I would think currently 4 - 4.5 times gross income dependent on level of exising personal debt such as credit cards and personal loans.

In any instance, most lender websites these days have a How Much Can I Borrow Calculator.

 

[Piston Broke]

just another happy story.....not!

http://www.abc.net.au/4corners/special_eds/20080331/debt/default.htm