Net Income Ratio: The Basics
Lenders use ratios to help them assess an applicant’s risk. They aim to determine if the applicant can handle the monthly mortgage repayment based on current expenses, debt, and their after-tax income.
One of the ratios that lenders use is the net income ratio. This ratio is a maximum percentage. The home loan applicant must meet it to give the lender confidence in their ability to repay the mortgage. In most cases, the ratio is a maximum ratio of 28%. They use 28% to leave the applicant wiggle-room. The stress threshold is 30%. If the applicant can’t handle the 30% threshold, they pose a high risk. The test result means that the applicant may overstretch themselves financially. It means that they’re better off taking on a lower mortgage amount or no home loan at all.
The net income ratio indicates that the applicant’s monthly repayment is not higher than 28% of their monthly income before deducting taxes.
The formal formula is gross income minus applicable tax payable.
To gauge your mortgage serviceability, use our Mortgage House online calculators such as the mortgage repayment calculator. In addition, our loan specialists receive access to proprietary tools that dig deeper into your financial ability to take on a monthly home loan repayment. They can discuss options with you.
Net Income Ratio Conclusion
Mortgage lenders use several ratios to help them assess an applicant’s serviceability. Among them is the net income ratio. In addition, Mortgage House loan specialists have access to proprietary tools that help them find the best products for most financial goals. Contact our team today.