Understanding Loan Approval Criteria: Security, Serviceability, and Equity

Ever wondered why not all loans get approved?

To secure a loan, your application needs to meet three key criteria:

1. Security
2. Serviceability
3. Equity

Let’s take a closer look at each.

Security

Security refers to the value of the property offered to the lender as collateral. It acts as a “safety net” for the lender in case things don’t go as planned during the loan term.

Generally, lenders won’t provide loans covering 100% of a property’s value. Instead, the standard Loan-to-Value Ratio (LVR) is less than 80%. Loans exceeding 80% LVR often require Lenders Mortgage Insurance (LMI), which is added to the loan and repaid with interest.

Over time, as the property value increases and the loan is paid down, the LVR decreases, creating equity—an asset that can be leveraged for future opportunities.

Serviceability

Serviceability is your ability to repay the loan, often determined by your borrowing capacity.

• For employed applicants, this typically relies on their PAYG income.
• For self-employed applicants, it depends on business profits attributable to them.

Lenders assess servicing income, which is your uncommitted income after accounting for tax, living expenses, and other commitments like credit cards or vehicle loans.

Equity

Equity is your contribution to the transaction, which is usually a cash deposit but can also come from other sources.

For instance, if a lender finances 80% of the property value, the remaining 20%—plus transaction costs like stamp duty and legal fees—must be provided by you.

Equity can be leveraged from various assets, offering flexibility in completing the purchase.

Often, loan applications meet two out of three criteria. But with a deeper understanding of lender policies and the right approach to structuring your application, success is far more achievable.

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#Loans #Finance Application #Finance #Business Loan #Home Loan