Loan serviceability is defined as your ability, as a borrower, to service or meet loan repayments as calculated by the lending institution. If you’re after a construction loan or a mortgage, the lender is likely to be very interested in how easily you’ll be able to make your repayments.
How is loan serviceability assessed?
Serviceability takes into account various personal financial factors, including your total income from all sources, your monthly expenditure, and all of your other outstanding liabilities, including things like credit card debts and other loans or leases.
After totalling these amounts, the lender will calculate an overall monthly cash surplus which is then used to determine serviceability of a final loan amount.
When you’re looking for approval for a loan, your total monthly debt expenses are expressed as a proportion of your gross monthly income. This is known as the ‘debt service ratio’ - and it should be set at a maximum of between 30 and 35 percent of your gross income.