Serviceability is the assessment a lender runs to determine whether a borrower can meet loan repayments from their income. In Australian residential lending, APRA requires authorised deposit-taking institutions (banks) to test serviceability at the contract rate plus a 3% buffer. A loan priced at 6.5% per annum is therefore assessed at 9.5%. That buffer exists to ensure borrowers can still service the debt if rates rise after settlement.
The serviceability calculation also accounts for: living expenses (assessed against the Household Expenditure Measure benchmark if declared expenses are lower), existing debt repayments across all facilities, the proposed new loan, and, for investment loans, a haircut on rental income (typically 70-80% of gross rent to allow for vacancy and outgoings).
Private lenders assess serviceability on commercial-reality grounds. On interest-only bridging or exit-funded structures, debt servicing is not the primary underwriting metric. The exit event, sale, refinance or development completion, is what repays the principal. Only the interest component needs to be covered (or capitalised) through the term. This distinction allows private lenders to write files that fail the bank serviceability buffer but are commercially sound.
Borrowers who fail bank serviceability despite strong underlying cashflows are frequently good candidates for private credit on a 12-24 month bridge to a point where bank serviceability passes: typically after income stabilises, self-employment history matures to two full years, or a higher-rate existing debt is discharged and the overall position improves.