When you apply for a home loan, lenders don't just look at how much you earn - they carefully assess whether you can actually service the loan over time. This process, called serviceability assessment, is particularly important for self-employed professionals and business owners who want to grow their wealth through property investment.
Understanding how serviceability works can make the difference between securing the home loan you need and facing disappointing rejections. Let's explore what lenders look for and how you can improve your borrowing capacity.
What Is Serviceability Assessment?
Serviceability assessment is the process lenders use to determine whether you can afford to make your loan repayments based on your income, expenses, and other financial commitments. It's not just about your current situation - lenders also consider potential changes like interest rate increases and shifts in your personal circumstances.
For self-employed borrowers, this assessment can be more complex than for PAYG employees. Lenders typically require two years of financial statements and tax returns, and they often take a conservative approach when calculating your income. They might average your income over multiple years or focus on your taxable income rather than your turnover.
The assessment also considers your existing debts, living expenses, and any other financial obligations. Lenders use a serviceability buffer - typically adding 2-3% to the current home loan interest rate - to ensure you can still afford repayments if rates increase.
Factors That Affect Your Serviceability
Several key elements influence how much you can borrow:
Income Verification
For self-employed professionals, lenders examine your business income carefully. They'll review your profit and loss statements, Business Activity Statements, and tax returns. Some lenders may also consider projected income if your business shows strong growth trends.
Existing Debts and Commitments
Your current financial obligations significantly impact your serviceability. This includes:
- Credit card limits (even if you don't carry a balance)
- Personal loans and car loans
- Other investment property loans
- HECS/HELP debt
- Child support or maintenance payments
Living Expenses
Lenders assess your regular living costs using either your declared expenses or a benchmark figure - whichever is higher. This covers everything from groceries and utilities to insurance and entertainment.
Loan Structure and Features
The type of home loan you choose affects serviceability too. Interest only loans may have different serviceability calculations than principal and interest loans. Similarly, the loan to value ratio (LVR) you're targeting can influence the assessment, particularly if you need to pay Lenders Mortgage Insurance (LMI).
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Book a chat with a Finance & Mortgage Broker at Makara Finance today.
How Self-Employed Borrowers Can Improve Their Serviceability
If you're self-employed and looking to invest in property or achieve home ownership, there are several strategies to strengthen your home loan application:
Maintain Clean Financial Records
Keep detailed, up-to-date financial statements. Work with your accountant to ensure your tax returns accurately reflect your earning capacity. Some self-employed borrowers add back certain deductions (like depreciation) that reduce taxable income but don't affect cash flow.
Reduce Unnecessary Credit Limits
Lenders calculate serviceability based on your total credit card limits, not your actual balances. If you have a $20,000 credit card limit but only use $2,000, the lender still factors in the full limit. Reducing unused limits can significantly improve borrowing capacity.
Structure Your Loan Appropriately
Consider home loan features that align with your financial goals. An offset account linked to your owner occupied home loan can help you build equity while maintaining access to funds. A split loan combining fixed rate and variable rate portions might provide stability while allowing flexibility.
Time Your Application Strategically
Applying when your business shows consistent, strong income makes a difference. If you've just had a down year, waiting until you can demonstrate improved earnings might be worthwhile.
Work With Specialists
Mortgage brokers who specialise in self-employed clients understand which lenders have more favourable serviceability policies. They can access Home Loan options from banks and lenders across Australia and match you with lenders who assess self-employed income more generously.
Understanding Different Loan Structures and Serviceability
The home loan products you select influence how lenders assess your application:
Variable vs Fixed Interest Rate Home Loans
A variable interest rate typically offers flexibility and potential rate discounts, though your repayments may fluctuate. Fixed interest rate loans provide certainty for budgeting. When calculating home loan repayments for serviceability, lenders often use higher rates than current home loan rates to ensure you can handle increases.
Investment Loans vs Owner-Occupied
If you're looking to invest in property, lenders might apply different serviceability criteria than for an owner occupied home loan. Investment loans typically have slightly higher interest rates, which affects serviceability calculations. However, rental income can offset this, though lenders usually only count 70-80% of expected rent.
Principal and Interest vs Interest Only
Interest only loans lower your immediate repayments but don't build equity in the same way. For investment properties, this structure can be tax-efficient, but lenders still assess your ability to eventually repay the principal.
The Home Loan Pre-Approval Advantage
Getting Home Loan pre-approval before you start property hunting gives you confidence about how much you can borrow. It shows sellers you're a serious buyer and helps you focus your search on properties within your confirmed borrowing capacity.
Pre-approval involves a thorough serviceability assessment, so lenders review your income, expenses, and financial position in detail. While conditions may apply and the approval is subject to property valuation, it provides a solid foundation for your property search.
For self-employed professionals, pre-approval is particularly valuable because it confirms which lenders accept your income documentation and how they calculate your serviceability.
Making Your Property Wealth Goals Reality
Understanding serviceability assessment helps you approach your home loan application with confidence. Whether you're looking to secure your first home loan, refinancing to improve your position, or expanding your property portfolio, knowing what lenders look for gives you a distinct advantage.
Serviceability isn't just a hurdle to overcome - it's designed to protect you from overcommitting financially. By working within realistic serviceability parameters, you can invest in property sustainably while maintaining financial stability and building long-term wealth.
If you're ready to explore your home loan options or want to understand your borrowing capacity, speaking with an experienced mortgage broker can provide clarity tailored to your specific situation.
Call one of our team or book an appointment at a time that works for you. We specialise in helping self-employed professionals and business owners access suitable home loan packages that support their property wealth goals.
