I get asked about bank servicing criteria all the time. Comes with the territory I suppose.
The cautiousness I totally get. Imagine putting in all the hard work to get prepped up as the ‘ideal borrower’ only to find that the banks are looking
at something else entirely different!
Say you are after a home loan. You take your living expenses away from your net income to work out your monthly surplus (or deficit 😱). You put that number
into any one of those online mortgage calculators, tinker with the total loan amount, loan terms and interest rates before arriving at a rough idea
of how much you can afford to borrow. It makes total sense to assume that the bank would lend you what its calculator is telling you.
Only it won’t. Because banks look at servicing very differently. They start with your net income and minus either your actual living expense or their preset
bank minimum for a borrower if you situation whichever is the highest. In the current market, we are seeing banks increasing their
preset minimums dramatically while clients are spending more cautiously in preparation for the coming recession. So being fiscally prudent actually
doesn’t help you from a serviceability point of view.
But that’s not it. Any proposed new mortgage debt is stress-tested on banks’ qualifying rates, not market rates. Which means you could be on a
2.99% loan but tested at 6.50-7.30% on a P&I basis. See how this can slow down first-home buyers even after they’ve put a deposit together?
Not that it is any more smooth-sailing for investors. As you grow your portfolio, two things tend to happen:
- You generate a rental income which would support further borrowing; and
- Some of...
