Loan Servicing Assessment Criteria

Published . Last revised .

Know Your Numbers

First determine on what time basis you want to do calculations. Monthly is the most common, but fortnightly, annually and weekly are used too. Once determined, express all quantities on that basis.

Next, determine the following fundamental quantities (these are considered fundamental as other quantities and metrics are calculated using them):

  • Gross Income
    • Income before tax
  • Net Income
    • Income after tax
  • Living Expenses
    • Regular household and personal expenses (e.g., utilities, groceries, transport, insurance, recreation et cetera).
  • Existing Liability Repayments
    • Payments for existing loans (house, car, personal etc.), credit cards, HECS debt, and any other lines of credit.
  • New Liability Repayments
    • Estimated repayments for the new loan

Once these fundamental quantities are known, then the following quantities can be calculated:

  • Total Expenses
    • Living Expenses + Existing Liability Repayments + New Liability Repayments
  • Total Liability Repayments
    • Existing Liability Repayments + New Liability Repayments
  • Net Surplus Income
    • Net Income - Total Expenses

Criteria

Better scores on these criteria suggest greater financial resilience, while a worse scores suggest less financial resilience, and therefore a higher risk of default. Better is relative to the target value.

Net Surplus Ratio (NSR)

Measures the amount of income available to at least pay the debt level one is applying for, but preferably more. 

NSR = (Net Income - Living Expenses) / Total Liability Repayments

Target: at least 1:1, preferably 1:1.05.

Example

On a monthly basis, suppose a borrower has:

  • Net income: $5,500
  • Living expenses: $1,200
  • Existing liability repayments: $400
  • New liability repayments: $3,000

Then:

  1. Total liability repayments = $400 + $3,000 = $3,400
  2. NSR = ($5,500 - $1,200) / $3,400 = 1:1.26

In this case, the NSR is 1:1.26, meaning the borrower would have enough money to pay 26% more than the debt level being applied for.

Net Surplus Percentage (NSP)

Measures the percentage of income left over after accounting for all expenses (including the new liability). 

NSP = (Net Surplus Income / Net Income) * 100

Target: at least 10%.

Example

On a monthly basis, suppose a borrower has:

  • Net income: $5,500
  • Living expenses: $1,200
  • Existing liability repayments: $400
  • New liability repayments: $3,000

Then:

  1. Total expenses = $1,200 + $500, + $3,000 = $4,700
  2. Net surplus income = $5,500 - $4,700 = $800
  3. NSP = ($800 / $5,500) * 100 = 14.54%

In this case, the NSP is 14.54%, meaning 14.54% of the borrowers net income remains after all expenses are paid for (including existing liabilities and the new liability).

Uncommitted Income (UI)

Measures the income left over after accounting for all expenses (including the new liability). 

UI = Net Income - Total Expenses

Target: at least non-negative, but the more, the better.

Debt Service Ratio (DSR)

Measures the ratio of net income that is used to service the total liabilities. 

DSR = Total Liability Repayments / Net Income

Target: less than 0.5:1.

Example

On a monthly basis, suppose a borrower has:

  • Net income: $5,500
  • Living expenses: $1,200
  • Existing liability repayments: $400
  • New liability repayments: $3,000

Then:

  1. Total liability repayments = $400 + $3,000 = $3,400
  2. DSR = $3,400 / 5,500 = 0.618

In this case, the ratio is 0.618:1, meaning 61.8% of the borrower's net income is used to service the liabilities.

Assessed Genuine Savings

Some banks require assessed genuine savings of approximately 5% of the purchase price. Other do not require it.

When Performing Calculations

Add a mortgage serviceability buffer as set by the Australian Prudential Regulation Authority. This was set as an additional 3% interest rate on top of the loan's interest rate.

On any line of credit (e.g. credit cards), apply a minimum repayment obligation of 2.5% to 3.0% of the approved credit limit. This is applied by banks even if there is a nil balance owning. For example, if a credit card has a limit of $8,500, the minimum monthly repayment at 3.0% will be $255 even if there is no balance owing on the credit card.

Other Notes

  • Expense adjustments: Some lenders use standardised living expense values instead of actual expenses to ensure consistency.
  • Stress testing: Some lenders perform calculations with higher interest rates or additional buffers to test the borrower's ability to service the loan under adverse conditions.
  • Typically, each dependent will reduce the amount able to be borrowed by $40,000 to $60,000.