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Understanding Serviceability

While it is relatively simple to understand the equity / deposit which lenders have in place I find many property investors hit brick walls eventually as they don’t understand the way that most lenders assess servicing.
As an investor you want to start by assessing what it is that you want to achieve from your investments and use this to set purchasing rules which as an example may be trying to purchase the properties at a certain discount to what you believe the property to be worth and also a certain return.
I recommend that investors set their return goals based on net yield (annual rent minus rates and insurance costs divided by purchase price) rather than gross yield (just the annual rent divided by the purchase price).
Thus when looking at a prospective property purchase as an investor you will look at the numbers as a basic profit and loss however note that the way the lenders look at the numbers is quite different.
Key points to note are:
  • Lenders only take 75-80% of rental income into consideration.
  • While lenders may allow you to have the mortgage on an interest only basis when calculating servicing they assess all debt on a principal and interest basis.
  • Generally rather than assessing servicing off the actual interest rates that you are paying currently, lenders use qualifying or assessment rates which can be considerably higher than the actual rates being paid.
  • If you are self employed or have hit a certain sized property portfolio at some lenders you may be assessed at a business banking division. What can happen is that unlike retail banking where the lenders generally amortise the debt over 30 years from a servicing point of view some business bankers will work off residual loan terms meaning that the payments are calculated on a principal and interest basis off the remaining loan term and if an interest only basis is included the remaining term once this has expired.
What tends to happen is that even if you can source positive cashflow properties often with the way lenders assess numbers they look negative to the lender. This means that most investors only have so much servicing before they hit a brick wall and can’t borrow any more unless they can increase income or decrease debt levels to a stage where servicing works again.
To illustrate the above I’ve used an example below which shows how an investors portfolio may actually be performing and then how a lender looks at the same numbers.


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Kris Pedersen Mortgages Limited

+64 9 486 4719
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Auckland 0622
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Auckland 1023
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Auckland 0740