Serviceability (how do the ratios that the banks use work ?)


Anyone currently help me with serviceability ratios? I remember when I first took out my home loan it used to be that no more than 30% could be allocated to loan repayments. Then they seemed to stretch to 40-45% if you were buying investment properties and including rental income. Clearly, however, as your salary rises your cost of living does not necessarily rise. I.e., if you gross $400k a year (I wish) and have $300k allocated to loan repayments you are hardly going to be on the breadline on the remaining $100k.

Whenever I apply to a loan I always seem to be short by some phenomenal amount of money (mysteriously $900 p.m.) This is clearly ridiculous because the tax deductions etc usually refund me this amount at the end of the year anyway. Presumably, initial serviceability is worked out taking into account the tax you pay on gross salary but what do the banks do when your deductions mean that you have no taxable income to speak of?

I'm confused. When assessing serviceability is it unreasonable to allocate 50 or 60 or 70% to loan repayments because you can live more than comfortably on the remaining 30%?

Donna L.
Don't forget that your after tax income is determined by what deductions you can make against your salary. If you lose your job, all the tax deductions in the world won't improve your position or your ability to service the loans !

It is a little bit risky relying on servicability from tax deductions on the assumption that you will always have work. I do believe that some banks will consider such things though - one of our resident brokers will be able to clarify that.
Yes......I'm always amused by the way some lending institutions worry about you being too 'rent reliant' as if this is such a bad thing compared with having one large salary.

Personally, if I was lending institution(hah....I wish!), I'd prefer to lend to someone who had a number of income sources(such as rents) rather than a single income that may be gone with the next company downsizing or sickness.

I take your point about the 'income' from depreciation only being there while you have an income such as a job but the banks count your job income so why not the depreciation. If you have the job income the depreciation is just as assured. They can't have it both ways.

What am I saying?..........of course they can........they have the money!

Hi Donna

Try some of the lenders that do take tax dedns into acct some include

St George
Adelaide Bank

to name a few

You might be surprised.

G'Day Donna,

The numerous times I argued with the bank about serviceability are now an almost forgotten memory.

I used to take in actual rental statements for full financial years and they would look at them and take off 20% and justifying that by saying that they were allowing for vacancies.
I would argue that these statements were representative of what I had actually received after all vacancies etc.

They wouldn't listen..........or maybe they just couldn't comprehend.......anyway......they don't have to any more......because

I found myself a finance broker that knows the lenders and their criteria and I have not had a serviceability problem since.....

see a good finance broker now and watch your servicability problems evaporate before your very eyes.

You may also want to consider ways to "artificially" raise your rents. For example you may want to include gardening, cable or other services with your rent however you will find that banks are still likely to take say 80% of the total rent received. The fact that the gardening expenses are included within the rent rather than an additional rent does not seem to be interesting to them.

So a house that normally rents for $200 pw might rent for say $220 with gardening included. This makes a difference of $832 per annum. Over multiple properties the effect can be huge.

Of ourse the bottom line is that you need to be comfortable with your level of borrowing and not let the amount the bank will lend you be a guide as to how much you can safely borrow.

Any comments Rolf?
Hi Donna,

This is how the CBA currently works out servicing and may help you to work a few things out for yourself....

Work out all your commitments as follows:

1. Credit cards - allow 2.5% of the limit per month (not the balance)

2. Home/Investment Home Loans - your minimum monthly repayment will be the bank's variable rate plus 1% less your professional discount if applicable, over the remaining P&I term (eg if a 30 year term with first 5 yrs I/O then use the remaining 25yrs of P&I)

Add up all your monthly commitments and subtract 70% of your gross monthly rental income (If $300p/w, multiply by 52 and divide by 12 and don't take off agents commission).

Divide the above figure into your Gross monthly income before all of your deductions (exclude rent) and this will be your servicing ratio.

If you earn over $40,000 per year then up to 40% is fine. Above this amount is "at the bank's discretion" and will be looked at on a net servicing basis where your tax return etc will be taken into consideration. You are correct that you don't need $100,000pa to live on and this is where the bank looks at cases individually.

Hope this helps