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Borrowers face higher bar: stricter home loan serviceability test

Looking to purchase a house? Learn more about how stricter serviceability tests could affect you as a first-time (or subsequent) buyer ...

March 22, 2023 • Last updated October 23, 2023 • 6 min read

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The Reserve Bank of Australia (RBA) is Australia’s central bank responsible for deciding the official cash rate. With the RBA’s decision to hold interest rates for now, banks have to factor in higher rates, fluctuating property values, and increasing costs of living into their assessments. As a result, some lenders have implemented stricter loan serviceability tests, meaning first-time (and subsequent) buyers entering the property market face tighter restrictions on how much they can borrow, making it harder for borrowers to qualify for a loan.

This guide will explore the changes to the home loan serviceability tests, what it means for borrowers, and how you can improve your chances of getting a home loan approval. But first, what is a home loan serviceability test?

Understanding home loan serviceability tests

It's important to know what home loan serviceability means, especially if you’re a first-time home buyer and not aware of the process of applying for a home loan. If you’re a second or subsequent home buyer, this is a nice refresher. Let’s get to it, shall we?

A home loan serviceability test is a lender’s evaluation process to determine whether or not a potential borrower has the financial capacity to repay the loan they’ve applied for and to help the lender decide whether or not to approve the loan. Various factors are assessed, including the borrower’s income, expenses, debts, and credit history, to determine whether they can afford loan repayments based on the interest rate, loan term, and other conditions.

Loan serviceability is essential financial preparation for the borrower to understand how much they can afford to borrow and repay every month. As a prospective borrower, you can gain insight into your borrowing capacity by using an online home loan serviceability calculator before approaching a lender.

Borrowing calculators are built to give you an indication of what you can borrow based on the information you’ve supplied – some calculators are simple, whilst others ask for more inputs – regardless, you should only use this as a guide. It’s good to understand what your potential repayments could be as well – some borrowing calculators will give you an example of what you could expect to pay each month on a home loan. Use this to work out what your budget could roughly be, and if you can afford to maintain your current lifestyle.

Changes to home loan serviceability tests

According to AusFinance, in 2021, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expects banks to use to assess the serviceability of home loan applications from 2.5% to 3%. In layman’s terms, this means that financial institutions must assess that you can afford your home loan repayments if interest rates increase by 3% based on the interest rate at the time of application. APRA insisted the increased interest rate buffer provides the necessary contingencies for rising interest rates during the life of the loan and accounts for unforeseen changes in a borrower’s income or expenses.

According to APRA Chair Wayne Byres, the decision was made to ensure banks are responsible for lending to borrowers who can afford the debt they are taking on at present and in the future. However, this decision also comes at a cost to borrowers, with 22% of loans approved in the June quarter being more than six times the borrower’s annual income — an increase of 16% from the previous year.

The introduction of new lending parameters

As a result of the changes, banks (and other financial institutions) have been asked to review what they believe to be acceptable debt-to-income (DTI) ratios. National Australia Bank (NAB) and ANZ have reduced their maximum ratios from 9 (that is allowing a loan that is nine times your income), to 8 and 7.5 respectively. That said, DTI ratios of six and over are still considered risky by APRA. An increased level of indebtedness in an environment with rising interest rates increases the potential of borrowers being unable to service their loans.


DTI before changes



DTI after changes



The impact of changing home loan serviceability tests on home buyers

As part of these new lending parameters, banks will assess how inflation affects each quarter of expenses, from petrol to groceries and utility bills. Banks are also looking more closely into significant one-off spending, meaning that prospective first-home buyers will have to be prepared to justify any more significant purchases.

How to improve your chances of getting a home loan

If you’re concerned about how stricter loan serviceability might impact your borrowing capacity, rest assured there are strategies you can take to put your best financial foot forward. Increase your serviceability by:

  • Maximising your income — If you’re thinking about switching to a higher-paying job or working towards a raise or promotion, the extra money in the piggy bank will increase your serviceability.
  • Lower your credit card limit, or cancel your cards altogether — Minimise using your credit card for emergencies where possible to promote your serviceability. You can do this by lowering your card’s credit limit, because even if you’re not using the full amount, most lenders will test your ability to afford home loan repayments if you were to owe the full amount. If you’ve been meaning to close off your accounts, now is a good time to consider getting this off your to-do list.
  • Pay off your debts — Allocate monthly funds to pay off credit card debt or any other personal debt you may have. Every little bit counts to impress lenders and demonstrate that you can pay off loans. Having less debt means you can free up your income and have it calculated towards your borrowing capacity too.
  • Cut back on unnecessary expenses — Take a critical look at your last month’s expenses and consider where there’s room for cutbacks. Whether reducing your takeaway meals to once a week or minimising unnecessary online shopping, this will show lenders you can afford your home loan repayments and manage money responsibly.
  • Pay your bills in a timely fashion — Home loan serviceability tests also mean assessing your bank statements, from your phone bill to utility bills, car insurance, and more. Missing a payment will end up on your credit report and potentially lower your credit score. Make timely payments to avoid any causes for concern when lenders assess your application.

Home loans made easy with Tiimely Home

Whether you’re a first-time home buyer or a seasoned investor, the mountain of paperwork and unsightly fees can be overwhelming. Ditch the paperwork and discover the ease of online home loans! At Tiimely Home, we’re the world’s first instant home loan, and strive to make the complex simple. Avoid the tedious back and forth with your average lender and opt for the seamless, automated experience at Tiimely Home. Our low-cost digital home loans could be delivered to you in as little as 58 minutes from the time you commence your application, contract and all.

And rest assured, our speedy service certainly does not compromise the high-quality customer service we provide our borrowers. If you have any queries, you can reach out to one of our friendly team members 7-days a week, who are more than happy to assist. For more information, read our home loan guide for helpful advice.


By Andrew

Credit Assessment Team Lead

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