When applying for a home loan, one of the most important hurdles you'll face is the serviceability assessment. This process determines whether you can afford the loan amount you're seeking and plays a crucial role in your Home Loan application success.
As a current or former ADF member, understanding how lenders evaluate your financial situation can help you prepare better and potentially increase your borrowing capacity. Let's break down what serviceability assessment involves and how it affects your path to buying a home.
What is Serviceability Assessment?
Serviceability assessment is how lenders determine your ability to meet home loan repayments over the life of the loan. Banks and lenders across Australia use this evaluation to decide:
• Whether to approve your Home Loan application
• The maximum loan amount they're willing to lend
• What interest rate to offer
• Whether you'll need lenders mortgage insurance (LMI)
This assessment goes beyond just looking at your current income. Lenders examine your entire financial picture to ensure you can handle repayments even if circumstances change, such as interest rate increases or unexpected expenses.
Key Factors in Your Serviceability Assessment
Income Verification
Lenders will scrutinise your income sources, including:
• Base salary or wages
• Allowances and benefits (particularly relevant for ADF members)
• Overtime and bonuses
• Investment income
• Any other regular income streams
For Defence personnel, certain allowances may be considered differently by various lenders. Some banks recognise the stability of military income and may be more flexible with allowances that others might discount.
Living Expenses and Commitments
Your banks statements will be reviewed to understand your spending patterns. Lenders look at:
• Essential expenses like groceries, utilities, and transport
• Existing loan repayments
• Credit card limits and commitments
• Childcare and education costs
• Insurance premiums
Ready to get started?
Book a chat with a Finance & Mortgage Brokers at Defence Loans today.
Interest Rate Buffer
Lenders don't just assess your ability to pay at today's rates. They apply a buffer (usually 2-3%) above the current home loan interest rate to ensure you can manage if rates rise. This means if you're looking at a variable interest rate of 6%, they'll assess your capacity at around 8-9%.
How ADF Members Can Improve Their Serviceability
Reduce Existing Debts
Paying down credit cards and personal loans before applying for a home loan can significantly improve your serviceability. Even unused credit card limits count against your borrowing capacity.
Choose the Right Loan Structure
Depending on your circumstances, different loan types might improve your serviceability:
• Variable home loan rates typically start lower than fixed rates
• An offset account can reduce interest charges while maintaining flexibility
• Interest-only periods might temporarily improve serviceability for investment properties
Gather Comprehensive Documentation
Having complete financial records ready can speed up the application process and help lenders understand your situation better. This includes recent banks statements, payslips, and tax returns.
Special Considerations for Defence Members
ADF members often have unique circumstances that can affect serviceability assessment:
Deployment and Posting Allowances
Some lenders may not count temporary allowances as ongoing income, while others recognise the regularity of Defence deployments and postings.
Property Investment Opportunities
Many Defence members consider investment properties. The serviceability assessment for investment loans differs from owner-occupied loans, as rental income and tax benefits are factored in.
Geographic Flexibility
Frequent relocations can actually be an advantage when it comes to property investment and building home equity across different markets.
Understanding Loan to Value Ratio (LVR)
Your LVR affects both serviceability and the overall loan structure. A lower LVR (meaning a larger deposit) can:
• Eliminate the need for lenders mortgage insurance
• Qualify you for better interest rate discounts
• Improve your overall loan serviceability
Defence members may have access to low deposit loans or even no LMI loans that can help with LVR challenges.
The Application Process
Once you understand your serviceability position, the streamlined application process becomes more manageable. Getting Home Loan pre-approval gives you confidence when looking at properties and helps you understand your true budget.
Calculating home loan repayments in advance helps you plan your budget and ensures you're comfortable with the ongoing commitment, not just what the lender approves.
Moving Forward with Confidence
Understanding serviceability assessment empowers you to make informed decisions about your Home Loan options. Whether you're buying your first home or looking to expand your property portfolio, knowing how lenders evaluate your application puts you in a stronger position.
The property market offers various opportunities, and having a clear picture of your borrowing capacity helps you identify realistic options within your budget.
Serviceability assessment might seem complex, but it's ultimately about ensuring you can comfortably manage your home loan repayments while maintaining your lifestyle. With proper preparation and understanding of the process, you can approach your Home Loan application with confidence.
Call one of our team or book an appointment at a time that works for you to discuss your specific serviceability situation and explore the Home Loan options available to Defence members.
