18 Dec 2021
Net Servicing Ratio: What You Need to Know
The average amount of debt each household carries in Australia continues to increase. In 2021, the amount reached $250,000. For several households, their mortgage is the source of their debt. The debt amount reaches that average because households require financing for big-ticket items.
Before a household accrues $250,000 in debt, lenders assess the applicant’s net servicing ratio. It takes into account their ability to take on more debt. The formula looks at the applicants after tax income, current debt liability, and expenses.
The net servicing ratio is standard among most lenders including Mortgage House. Lenders use buffering to assess each applicant’s risk. They add 3% points to the interest rate. Then they stress test the applicant’s finances against the new rate. If the applicant’s finances can withstand the percentage increase monthly, they pose less risk. Lenders can apply the same logic to NSR.
NSR represents their current level of debt owed and expenses. If they go up or even remain the same, the ratio helps the lender assess risk.
The formal formula is gross income minus applicable tax payable. Divide it by the cost of servicing liabilities.
One way to estimate it is by using our online calculators. It’s free to use and has no strings attached. Moreover, you can evaluate several scenarios. For example, you can see what happens when you reduce your debt including the amount owed toward credit cards. If you’re ready to refinance a home loan, let us know.
Net Servicing Ratio Conclusion
The net servicing ratio allows lenders to assess their risk for any home loan they issue. Every lender has a method for calculating risk. Mortgage House does too. To assess your serviceability, contact our loan specialists to discuss the information.