Serviceability Ratio Calculator

| Added in Personal Finance

What Are Serviceability Ratios and Why Should You Care?

Ever wondered how much of your income is swallowed up by debt payments each month? That's where the Serviceability Ratio comes into play. It's a percentage that shows you just that. Knowing your Serviceability Ratio can be a game-changer when it comes to loan approvals, refinancing, and managing your finances better.

A good Serviceability Ratio typically falls below 35%. If you're above that, it might spell trouble in the eyes of lenders. They could see you as a high-risk borrower, which isn't ideal if you're looking for a loan. So, keeping tabs on this ratio can help you keep your financial health in check and make you more appealing to lenders.

How To Calculate Serviceability Ratios

Calculating your Serviceability Ratio is straightforward:

  1. Determine your monthly debt payments: This includes all your loans, credit card bills, and other recurring debt
  2. Determine your monthly gross income: Your gross income is your income before any deductions, like taxes
  3. Use the formula:

[\text{Serviceability Ratio (SRV)} = \frac{\text{Monthly Debt Payments (MD)}}{\text{Monthly Gross Income (MI)}} \times 100]

Where:

  • Serviceability Ratio (SRV) is the percentage indicating how much of your income goes to debt payments
  • Monthly Debt Payments (MD) is the total monthly debt payments
  • Monthly Gross Income (MI) is your total monthly income before taxes and deductions

Calculation Example

Say your monthly debt payments amount to $2,500, and your monthly gross income is $6,000:

  1. Monthly Debt Payments (MD): $2,500
  2. Monthly Gross Income (MI): $6,000

[\text{Serviceability Ratio (SRV)} = \frac{2,500}{6,000} \times 100 \approx 41.67%]

In this example, the Serviceability Ratio is approximately 41.67%, which is higher than the ideal 35%.

Frequently Asked Questions

A good serviceability ratio typically falls below 35%. When less than 35% of your income goes toward debt payments, you are generally in a healthy financial situation.

A high serviceability ratio, typically above 35%, can make lenders think twice before approving a loan. They may see you as a higher financial risk.

Yes, a better (lower) serviceability ratio can make you more attractive to lenders, potentially securing you better loan terms or interest rates.

Several factors can impact this ratio, including total monthly debt payments, gross monthly income, any changes in your income, additional debts, and fluctuations in interest rates.