Updated November 12th 2013

What affects loan serviceability

  • Loan borrowing capacity can be affected by what liabilities a person has (eg credit cards, store accounts, store finance, personal loans & vehicle finance).
  • Excessive credit card limits and credit cards held and not used will reduce your loan borrowing capacity.
  • Income will also determine your loan borrowing capacity. A person investing in property will increase income with the rent they’ll receive which increases loan borrowing capacity.
  • Living expenses affect loan borrowing capacity (ie number and age of dependants, life style).
  • Non-deductable debt verses deductable debt (ie negative gearing). Lenders allow for negative gearing for investors in serviceability which increases loan borrowing capacity.

What do you need to do to maximise your loan borrowing capacity and how to meet the lenders serviceability criteria

From 1 July 2012 you need to report if all the following apply:

  • Reduce credit card limits to manageable levels.
  • Cancel and close unused credit card accounts.
  • Consolidate debt.
  • By consolidating credit cards, personal loans debt etc this reduces monthly commitments on these debts and there is additional income for servicing a new loan.
  • Have a budget and manage living expenses (eg entertainment, restaurants etc) which increases savings and also increases borrowing capacity.
  • Have tax returns completed and lodged, as lenders will require current financial details for a loan application.
  • Increase repayments on non-deductable debt home loans and also increase equity in a property to use for investment.

Is there a way to structure loans to increase borrowing capacity

  • Having split loans, being a separate loan for the investment property purchase, and as such the investment loan would be interest only which enables better management of the investment (ie maximise tax benefits with negative gearing) and maximise cash flow for loan servicing.
  • Having split banking (ie with two lenders) can increase loan borrowing capacity with multiple investment properties.

If all loans are with one lender then borrowing capacity can be reduced with that lender, being the way that lender assesses the total loans held with it.

If the client has loans with other lenders then this gives them greater borrowing capacity as those loans are not assessed at a higher repayment level, but at actual repayments.