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Buying a home

What is loan serviceability and how do banks calculate it?

14 July 2022

“How much can I borrow?”

When you’re thinking about a home loan, it’s one of the first questions you’re likely to ask.

For a lender answering this question, one important consideration is “how much can you comfortably pay back, now, and in the future?”

It’s what banks call ‘loan serviceability’.

How banks calculate a borrower’s ability to service a loan

When estimating a borrower’s ability to repay, or service a loan, lenders consider a range of factors, including an applicant’s:

  • income
  • expenses, and 
  • debt commitments – like credit card limits.

A good way to understand how much home loan you can afford is to talk to a Suncorp Bank home loan specialist. They can also explain the different types of loans available, their costs and benefits, and which could be right for you.

Suncorp Bank’s easy-to-use home loan calculators are also great starting points.

With our Home Loan Repayment Calculator, you can experiment with different loan amounts and terms (the loan term is the number of years you’ll be making repayments) to see how much your monthly repayments might be.

Similarly, the Home Loan Borrowing Calculator gives you a quick estimate of how much you could potentially borrow based on your income and expenses.

What types of income will lenders consider?

When looking at your ability to service a loan, lenders will often consider various types of personal income, including:

  • salary and wages
  • sole trader business profits
  • investments, such as rental properties and dividends, and
  • payments from Centrelink.

Because some income may be less consistent year-over-year, it may be factored differently. For example, a rental property could go without tenants for a period of time and share market dividends can fluctuate. As a result, a lender may only factor a portion of your investment income when assessing your ability to service a loan.

Loan serviceability changes when interest rates go up and down

Lenders know interest rates can increase so they’ll factor that into loan serviceability too.

Hypothetically, let's say you’re interested in borrowing $400,000 and the advertised annual variable interest rate is 2.70%. At that rate, your repayments would be $1,835 per month on a 25-year loan. In reviewing your application, a lender may calculate the loan’s affordability if the rate went up three percentage points, to 5.70% p.a. Under that scenario, your monthly repayments would be $2,504. The lender would want to be confident that amount would still be affordable based on your current and estimated future finances.

How to improve your ability to service a loan

While increasing your income can sometimes be beyond your control, you can usually reduce your expenses. You might want to start by paying down high-interest debt.

You can also close credit card accounts you’re not actively using. Even if you don’t owe money on a card, the available credit can reduce your borrowing capacity.

Talk to an expert about your home loan options

Suncorp Bank’s lending specialists can help you make informed decisions, whether you’re a first home buyer or an experienced property investor. All information and advice is 100% obligation-free.

Talk to a home lending expert

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Banking products are issued by Suncorp-Metway Ltd ABN 66 010 831 722 AFSL No 229882 Australian Credit Licence 229882 (“Suncorp Bank”) to approved applicants only. Please read the relevant Product Information Document, Lending Fees and Charges and Home Package Plus Terms and Conditions before making a decision regarding any Suncorp Bank products. Fees, charges, terms and conditions apply and are available on request or on our Product Information Documents and Forms page.

The information in this article is intended to be of a general nature only and any advice has been prepared without taking into account your particular objectives, financial situations or needs, so you should consider whether it is appropriate for you before acting on it. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.