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Australians wanting to purchase a property have been advised to have a strategic plan to boost their serviceability, as lenders hone in on various factors affecting their ability to make repayments on a mortgage.
Understanding serviceability is crucial for anyone wanting to purchase a property, and is affected by various factors such as income, deductions, debt and living expenses.
However, with the rollout of new government changes, some Australians with a HELP debt are in a better position to service a home loan.
The Smart Property Investment Show host Phil Tarrant sat down with Finni Mortgages’ Robert Le to delve into the topic and discuss what investors should consider when applying for a mortgage.
Le said that while many Australians focus simply on how much they earn, other income-related factors include overtime and deductions from income.
“And given that we’re in the new financial year, a lot of people would have received pay rises and take into account, with the new interest rates that we’ve seen changed in the recent months, that also changes in terms of serviceability as well,” he said.
“Just looking at, for example, overtime, some lenders look at trading at 80 per cent. Some actually take 100 per cent of the commission and overtime, or some also average it over the last six months as well.
“So just depending on the broker’s understanding as to where you can take it, and also providing the option back to the client.”
Le said that even though overtime fluctuates, certain lenders will use 100 per cent if the pay has been consistently received for the past six months and if the client has been in the role for a sufficient amount of time.
However, Le said that voluntary super contributions do not negatively impact serviceability, given they can be reduced or stopped.
“Sometimes we just need a letter from either the client or just a verbal agreement between the client, and saying that they’re happy to cancel it. We can factor that additional contribution back into servicing as well,” he said.
He added that credit cards and store cards can affect clients’ serviceability, with lenders usually taking into account 3.8 per cent of the credit limit.
“So say, for example, there’s a credit limit of $10,000. They will factor in the minimum repayment of that is $380. But let’s say if you were to reduce it down to $1,000, then that’s only $38 a month,” he said.
In addition, living expenses may also play a major role in serviceability, with clients usually needing to show proof of restrained spending for a few months to give lenders confidence.
Spending lavishly on food, such as frequent takeout, may be looked at unfavourably by lenders, while taking cash out in particular settings, including pubs, may be red flags.
“We’ve seen a lot of clients come back, let’s say in January or February, and some of them are discretionary expenses, like, let’s say gifts over the Christmas break or New Year’s, or there might be certain sports bets or tab that also hinders on their serviceability,” Le said.
“So sometimes we have those clients come back, let’s say, after three to four months, and we review it again and we can see that they’re in a better position. And then we’ll put forward their application.”
It comes after Treasurer Jim Chalmers earlier in the year directed the Australian Prudential Regulation Authority (APRA) to reconsider how banks factor in HELP debt to mortgage assessments.
From 30 September, lenders are expected to no longer consider HELP debt when servicing mortgages if the repayments are expected to be completed within 12 months.
The changes will enable more young people to get a foothold in the property market by removing a major obstacle preventing them from obtaining a home loan.
Recently, major banks have made changes to their policies to help young Australians get into the property market more easily.
If someone owes $20,000 or less in student debt, this does not impact how much they can borrow with NAB.
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