Serviceability in

Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...

banking A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

is the ability of a

debtor A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

to meet

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

repayments. In the 1990s debt serviceability criteria had been relaxed, but nowadays it's harder to get finance. Every

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

has own serviceability model.

The essence

Under the Consumer Credit Code, before

s can approve

borrower A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...

's application, they must carry out an assessment of his ability to service any

without financial hardship. Creditors refusing to extend loans to people whose repayments exceeding ⅓ of their gross income (such persons are considered to be "''mortgage stressed''").

Calculation

Lenders establish the maximum amount of

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

that borrower can afford to take on given his current

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...

by applying a debt-to-income ratio. Every creditor sets his own ratio, however, most lenders set a maximum debt service ratio of between 30 and 35%. Also, some creditors apply number of measures to "protect" borrower from any changing circumstances (

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

rises, income reduction etc).

Income

In some industries (

police The police are a constituted body of persons empowered by a state, with the aim to enforce the law, to ensure the safety, health and possessions of citizens, and to prevent crime and civil disorder. Their lawful powers include arrest and t ...

fire services A fire department (American English) or fire brigade (Commonwealth English), also known as a fire authority, fire district, fire and rescue, or fire service in some areas, is an organization that provides fire prevention and fire suppression se ...

and

nursing Nursing is a profession within the health care sector focused on the care of individuals, families, and communities so they may attain, maintain, or recover optimal health and quality of life. Nurses may be differentiated from other health ...

, for example),

overtime Overtime is the amount of time someone works beyond normal working hours. The term is also used for the pay received for this time. Normal hours may be determined in several ways: *by custom (what is considered healthy or reasonable by society), ...

is an integral part of income and is considered for serviceability criteria. But for other professions, a reduced proportion of overtime income is used. In which case, the creditor will only apply a reduced amount of the borrower's overtime in calculating serviceability. The income from a second job is considered if the job has been held continuously for at least one year. When calculating serviceability, creditors consider rental income from investment properties. But a lot of banks will only use 75% of rental income.

Liabilities

Existing or potential debt reduces the amount for a new loan. In the case of credit cards, most creditors set a minimum repayment obligation of 2.5 – 3.0% of the approved credit limit. So, usually, creditors require account statements to confirm monthly repayments.

Other factors

Some creditors not consider property investors'

tax benefits Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and tax credits. T ...

they receive if their loan is negatively geared. Creditors add a

margin Margin may refer to: Physical or graphical edges *Margin (typography), the white space that surrounds the content of a page *Continental margin, the zone of the ocean floor that separates the thin oceanic crust from thick continental crust *Leaf ...

(today is around 2,5% and more) to the

variable rate A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. Floating intere ...

, to arrive the "''assessment rate''", when calculating repayments for a new loan. This means that creditors want to know whether borrower would be able to repay his debts if interest rates reach 7.5% and higher.

References

{{Banking in Australia Banking terms Banking in Australia