Refinance Serviceability, Explained: Can You Afford to Switch?

Refinance serviceability is the lender’s test of whether you can comfortably afford the repayments on a new home loan before they approve the switch. When you refinance, you are applying for a brand new loan, so the lender runs the same affordability check you faced the first time you borrowed. They look at your income, your living expenses, your other debts, and a buffer on top of the interest rate to make sure the repayments still fit if rates rise. This guide explains what goes into that test, why a refinance can be declined even when your current loan is paid on time, and how to work out whether you can afford to refinance.

This is general information only and not credit advice. The figures here draw on the Australian Securities and Investments Commission’s MoneySmart service and the Australian Prudential Regulation Authority (APRA), the regulator that sets lending standards. Whether you qualify depends on your circumstances and each lender’s criteria.

If you are weighing up a switch, the rate, costs and lender decisions come together on our refinance home loans hub.

What refinance serviceability actually means

Serviceability is a lender’s word for your ability to service, or keep up with, a loan. When you refinance, you are not just adjusting your existing loan. You are closing it and opening a new one, either with a new lender or with your current one on a different product. Because it is a new loan, the lender assesses your home loan serviceability from scratch.

That assessment is the heart of the application. A lender adds up the money you have coming in and the money going out, factors in your existing commitments, and works out whether there is enough room in your budget to meet the new repayments. MoneySmart’s general advice for any home loan applies here too: be realistic about what you can afford, and to give yourself some breathing room, calculate what your costs would be if interest rates went up.

This is why some people are surprised to be declined. You can have a spotless repayment history on your current mortgage and still fall short on serviceability, because the test is forward looking. It asks whether you could handle the new loan under pressure, not just whether you have handled the old one.

What a lender looks at when assessing serviceability

A serviceability assessment weighs a few moving parts together. No single figure decides it. The main inputs are:

• Income. Your salary, and often a portion of other income such as bonuses, rental income, or self-employed earnings. Lenders apply their own rules to how much of each type they count.
• Living expenses. Your everyday costs, from groceries and utilities to school fees and insurance. Lenders compare your stated expenses against benchmark figures.
• Existing debts. Credit cards, personal loans, car finance, and buy-now-pay-later commitments. The limit on a credit card can count against you even if the balance is zero.
• The interest rate buffer. The lender does not assess you at the advertised rate. They add a margin on top, so you are tested against a higher rate than you will actually pay at the start.

Get any one of these wrong and the picture changes. A new car loan taken out the month before you apply, or a credit card limit you never use, can quietly lower the amount you can borrow.

The serviceability buffer: the figure that catches people out

The serviceability buffer is the part of the test most borrowers do not see coming. Rather than checking that you can afford repayments at today’s rate, lenders are expected to check that you could still afford them if rates climbed.

APRA expects lenders to assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate. So if a loan is advertised at, say, 6 per cent, the lender tests your budget against repayments calculated at roughly 9 per cent. The buffer was previously set at 2.5 percentage points before APRA lifted it to 3.0 percentage points.

The buffer is a contingency. It gives you headroom if rates rise over the life of the loan, or if your income or expenses change unexpectedly. It also explains a frustrating situation some borrowers hit: a loan that looks cheaper on its advertised rate can be harder to qualify for once the buffer is applied, because the test rate is what counts, not the headline rate.

You can get a feel for this yourself. Work out what your repayments would look like a few percentage points higher than the rate you are being offered. MoneySmart suggests a similar exercise, calculating what your costs would be if interest rates went up by 2 per cent, as a way to stress-test your own budget before you commit.

Why refinancing can fail serviceability when your current loan does not

It feels backwards to be told you cannot afford a loan you are already paying. There are a few common reasons it happens.

Your circumstances may have changed since you first borrowed. A drop in income, a move from full-time to casual work, a new dependant, or a fresh debt all eat into serviceability. The buffer may also be higher now than when you took out the original loan, which tightens the test.

There is also the loan term to watch. Refinancing often starts a fresh loan term. A longer term lowers the monthly repayment, which can help you pass serviceability, but the longer you have a loan, the more you will pay in interest overall. Passing the test by stretching the term can cost you more across the life of the loan, so it is a trade-off worth understanding rather than a free win.

How to work out if you can afford to refinance

Before you apply, you can do a rough version of the lender’s test yourself.

A borrowing power calculator does the arithmetic for you. Try the how much can you borrow calculator to estimate the figure, then sense-check it against the buffer. Our guide to borrowing power explains how lenders turn income and expenses into a borrowing limit.

Keep in mind that a calculator estimate is not an approval. You still need to satisfy the lender’s own criteria, and different lenders assess the same income and expenses differently.

How to strengthen your serviceability before you apply

If the numbers are tight, a few moves can improve your position over the months before you apply.

Reducing or closing unused credit cards lowers the limits counted against you. Paying down a personal loan or car loan frees up income in the lender’s calculation. Trimming discretionary spending in the months before you apply helps, since lenders review recent statements. And because lenders assess the same situation differently, the loan that suits your circumstances may sit with a lender you have not considered. Comparing on the comparison rate, rather than the headline rate, keeps the focus on the true cost of each option, which our comparison rate explained guide unpacks.

If you have less than 20 per cent equity, lenders mortgage insurance may also apply on the new loan, which adds to the cost of switching. Our guides to what lenders mortgage insurance is and how to avoid LMI cover who it protects and the ways borrowers reduce or sidestep it.

Serviceability is where a lot of refinances are won or lost, and the rules differ from one lender to the next. If you want to understand where your numbers sit before you apply, the team at Finance Lab can walk you through it and point you to the lenders whose criteria suit your circumstances.