RSS Feed

Ryan Smuts: Understanding serviceability

Monday, May 11, 2020



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:

  1. You generate a rental income which would support further borrowing; and
  2. Some of your debt get put on an interest-only basis to maximise tax efficiency.

Sounds great? Not really.

Banks usually account for 75%-80% of the gross rent only. The thinking is that the opex of owning rentals (think vacancy, rates, insurance, management, maintenance etc) would chew up 20-25% of the rent irrespective of your business efficiency or acumen. Imagine having a quarter of your income taken off the table just like that!

Also, you will never rid yourself the P&I stench even if you are on interest-only loans. Say you have a 30-year mortgage 5 of which are on interest-only and you apply for a new loan. Your existing debts will be assessed at a 6.50-7.30% qualifying rate over 25-years. That could dramatically decrease your serviceability.

Still not quite seeing it? Let’s use some hard numbers to illustrate the point. Say you have $500K of lending on a 30-year term at 4.25%. For the first five years, you are on interest-only. The property is returning $600 gross per week ($31,200 p.a.) and costing you $5K p.a. of opex and $21,250 of mortgage repayments per year.

By your count, the property would be cash positive at $4,950 p.a. or just over $95 per week.

‘No.’ says your bank. Firstly, opex would be $7,800 (being 25% of $31,200)and mortgage replaying would be $43,344 (assuming the higher 7.25% qualifying rate). So from the bank’s point of view, your property is losing you $19,944 p.a. or $384 per week.

See how a dramatically different set of serviceability criteria changes your ability to get a deal across the line?

My advice? Get in touch with your broker early in the piece to work out your serviceability and borrowing capacity. When you know what you can afford, you waste less time looking at pipe-dream deals. Working out your serviceability early also gives you more opportunity to improve your borrowing position.


My team and I are actively working with investors to get deals across the line even throughout COVID-19. Feel free to send me an email if you would like to have a chat about how we can help you meet your investment goals in 2020. 


Ryan Smuts 

Ryan is a Key Accounts Manager at Kris Pedersen Mortgages and Insurance as well as a property investor. 





Recent Posts


equity cat education Investment tip Standards New Zealand rent Editor's Choice positive cash flow asbestos CCC boarding house How to Market report Property (Relationships) Act rent arrears Question and answer Q&A worksafe advice cash-flow extractor fan wins ocr warren buffett smoke alarm television property management landlord maintenance ventilation CoreLogic election 2017 sublease relationship sale and purchas yield subdivision tenancy tribunal finance building wealth creation market productivity minor dwelling HHS nzpif insurance meth p lab income banking return khh gluckman report winz RTAA 2019 buyer's agent buying rules letting fee rent increase shower dome anz inspection management investor capital gain auckland auckland council negotiation trespass legal Kris Pedersen Mortgages and Insurance unitary plan beginner investor rta airbnb watercare Gluckman property trademe Jeff Bezos tenant property value HHGA government Guest blog debt enforcement Must know Landlording will development partners Holler financial advisers act water bill bond form bad tenant Case study election2020 market rent principal and interest Must knows speculator Sponsored post barfoot and thompson heating meth contamination rtaa2020 rta reform tenancy services off the plan kiwibuild interest only tenancy issues investment strategy sale and purchase warm up new zealand initio bond twg report robert kiyosaki scotney williams anti-social behaviour skill shortage property maintenance interest rates DTI privacy short-term rental structure mindset letting business Investor story rental market property cycle data security early termination fixed-term tenancy holiday house house prices housing bubble renovation Tribunal case study personal growth RBNZ first home buying rental wof heater housing affordability trust parry v inglis HSWA recycling equity commerce commission property apprentice opes partners Level 4 ask an expert lvr LIM clnz damage covid-19 ird TCIT re agent cgt buying mortgage reserve bank ring-fencing insulation termination tax


Introducing Our Partners
Principal Sponsor - Kris Pedersen Mortgages & Insurance logo Gold Sponsor - Barfoot & Thompson logo Gold Sponsor - CoreLogic logo Property Apprentice logo The Insulation Warehouse logo The Renovation Team logo The New Zealand Property Investors' Federation logo
09 360 2376

The Tenancy Practice Service and TPS Credit Control work closely with the Auckland Property Investors' Association. Our vision of bringing helpful resources, documents and high quality services to Auckland Property Investors and Property Managers is shared by APIA, so its a partnership that works well. 

The Auckland Property Investors' Association is a great organisation for those who want access to advice and information from a range of industry experts and partners. 

Mathieu Holt- Managing Director, The Tenancy Practice Service & TPS Credit Control
Through the Association I found the channels and methods to fund the purchase of property I never dreamed about. Grant Brown

All round it has been one of those things Neil and I felt was really worthwhile belonging to. We have learned so much it has just built our confidence in what we are doing.

Janice Bieleski
I read two articles in the monthly magazine that saved me over $5,000. That is my membership fee for the next 26 years and I am sure I will learn a whole lot more! John Duncan
Fantastic organisation. The networking opportunities are brilliant and provide us with information and opportunities that cannot be obtained anywhere else. We learn something new at every meeting and we've been in this game for nearly 20 years. Pauline and Gyanen Kumar

I find the information obtained from various APIA meetings very useful in guiding my own property investment and rental management.  I also enjoy the networking opportunities with like-minded investors.  I am inspired by other investors’ success and find the more experiences and knowledge that I share with others, the more confident I become.  

Thanks to all APIA event organizers and administrators for your brilliant work. 

Stella Shao

I like talking to people and learning from their experience because it gives me the confidence to invest well. I think it is a knowledge thing. I now know I am doing things the right way.

Stephen Weatherall

My APIA membership has become a total success.

Every time I attend a monthly or regional meeting I come away with so many useful and positive tips that have added value to my property investments and management.

Not only that, the website is a great place for practical advice and useful information. It has now evolved into an important resource for my business.

Talk about value for money! The discounts I have been getting at Bunnings when I present my APIA membership card have more than paid for my annual subscription!

Tim Duffett, Plan A Investments Limited