Home loan serviceability: What is it and how can you increase yours?

Calculating your home loan serviceability.

When taking out a home loan, the amount a bank or lender will grant you will depend on a few things. Along with your loan to value ratio (LVR) and credit score, you’ll also likely hear the term “serviceability” pop up. But what does serviceability mean, and why is it so important?

Home loan serviceability meaning

When a bank calculates your home loan serviceability, they are essentially stress-testing your ability to pay off a mortgage. They do this by looking at your income and expenses (among other factors) to determine how much you could comfortably afford to pay. 

Based on this information, banks will generate your debt service ratio (DSR). This is how much of your monthly income you can expect to go towards "servicing" or paying off your debt, expressed as a percentage.

While there’s some flexibility when setting serviceability floors, banks will generally err on the side of caution. That’s because the Australian Prudential Regulation Authority (APRA) holds banks to strict standards to ensure they’re not issuing loans to borrowers who can’t afford them.

How is home loan serviceability calculated?

When determining your ability to service a home loan, banks will take your after-tax income and subtract expenses and any other liabilities, such as credit card debt or money owed on another loan.

Banks will also add a 3% buffer to your home loan interest rate to accommodate any future rate hikes. That means if you sign up for a $500,000 loan with an interest rate of 5% p.a., you’ll be assessed on your ability to pay off that same loan at 8%. 

Before July 2019, lenders would use a minimum interest rate of at least 7%, but this was deemed needlessly high and amended to better reflect the current interest rate environment. Nowadays, lenders are advised to add a margin of at least 3% to a loan’s rate.

How is income assessed for your home loan?

The amount of income you earn in a year is pretty high on the list of things lenders look at. Essentially, all they are looking for is a consistent salary over a stretch of time. But how your income is assessed isn't always clear cut, especially if you work overtime or freelance. 

Those who work in emergency services can generally expect to have overtime payments included in their serviceability assessments. But for professions where overtime payments aren’t so frequent, or aren’t as integral a part of the job, lenders might consider them at a reduced rate.

Restrictions will also apply to any income you receive from second jobs. For example, if you freelance or work in the gig economy to supplement income from your main job, any money you earn may only be considered if you have held the job continuously and for a certain period of time.

As for income from rental properties and investments, lenders will apply a buffer to account for any vacancy periods or fluctuations in the market, meaning that any money you receive from your portfolio will only be partially assessed.

RELATED: CommBank, Westpac, and NAB just lowered their serviceability tests for refinancers

How can you increase your home loan serviceability?

How much you can borrow for a mortgage will ultimately depend on your lender and the criteria they use to test your serviceability. However, there are still strategies you can take to put your best foot forward.

Here are the main ways you can increase your home loan serviceability:

  • Increase your income
  • Reduce debt
  • Reduce your expenses
  • Lower your credit limits

Lenders don't want their loan competing with other claims on your hard-earned income, so the more financial wiggle room you can demonstrate, the better. Otherwise, you might unintentionally look like a home loan red flag

Let's explore why each of this tactics could work.

Increase your income

The most obvious way to increase your home loan serviceability (though by no means the easiest) is to increase the amount of money you earn. You could do this by asking your employer for a pay raise, applying for a higher paying job, or even taking on a second job.

Reduce your expenses

Lenders will scrutinise your spending habits over the three months prior to applying for a home loan, so if you want to boost your borrowing power, you’ll have to rein in any unnecessary purchases and show you can be responsible with your money.

Reduce debt

If you have any existing debt, try to pay it off as soon as possible. If you’re not sure where to start, identify which debt is accruing the most interest and tackle that one first.

Lower your credit limits

When determining your serviceability, lenders will usually calculate your minimum monthly repayment at 3% of your approved credit card limit. High credit limits don’t go over well, so try to reduce them where you can. And if you have any unused cards it’s a good idea to cancel them too.

Borrow with another person

Whether it’s with a partner, a parent or a friend, you’ll have an easier time applying for a home loan with another person than if you’re borrowing solo.


If you’re thinking of taking out a loan, use our home loan borrowing calculator to get a rough estimate of your borrowing power based on your current income and living expenses. And if you’re wondering where rates currently sit, browse our home loan comparison page for an idea.

Compare low interest rate home loans - last updated 13 April 2024

Search promoted home loans below or do a full Mozo database search. Advertiser disclosure
  • Offset Home Loan

    Package, Owner Occupier, LVR<60%, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    6.15% p.a. variable
    6.40% p.a.

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

    Compare
    Details
  • Mozo Expert Choice Badge
    Express Home Loan

    Owner Occupier, Principal & Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    6.01% p.a. variable
    6.14% p.a.

    Get fast online approval from the award-winning Bendigo Bank Express Home Loan. Multiple offset accounts and redraw available. 100% offset on variable rate loans and partial offset on fixed rate. Flexible repayment options. New home loans only.

    Compare
    Details
  • Neat Home Loan

    Owner Occupier, Principal & Interest, LVR <60%

    interest rate
    comparison rate
    Initial monthly repayment
    6.14% p.a. variable
    6.16% p.a.

    Competitively-priced variable rate loan. Ideal for owner occupiers and investors. No service fees to pay. Make free extra repayments and redraws. Flexible repayment schedule available.

    Compare
    Details
  • Mozo Expert Choice Badge
    Police Value Home Loan

    Fixed, Owner Occupier, Principal & Interest, LVR <90%

    interest rate
    comparison rate
    Initial monthly repayment
    5.79% p.a.
    fixed 3 years
    6.26% p.a.

    Refinance your eligible home loan to get $2,000 cashback (T&Cs apply). Establishment fee applicable. Stay in control of your financial future and lock in some certainty with the Police Bank Fixed Value Home Loan. Only 10% deposit required. No monthly account keeping fee or annual fee to pay. Choose your repayment schedule – weekly, fortnightly or monthly.

    Compare
    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.