Debt Serviceability

The way banks calculate debt servicing can be quite a different picture from our real profit and loss account. What does this mean is that you can be optimistic about how much you can borrow before max out your capacity? I will use an example below to illustrate the difference. 

Investor's View
Gross rent $580pw on property valued at $800k        30,160
Borrowing $520k (65% LVR) @4.5% interest Only        23,400
Operating expenses          5,500
Net Surplus before tax          1,260
Bank's view
Rent 75% of $580pw        22,620
$520k debt @ 7.5% P&I over 30 years                            43,620
Net Deficit -      21,000

In the scenario above, the investor sees positive cash flow of $1260 whereas bank does not think you can service $520k due to the cashflow deficit. Why?

  • The bank use assessment rate of 7.5% -7.8% at present regardless the actual current interest rate. The reason for them to use much higher rate is because once they approve the loan, they commit to you for 25- 30 years. Interest rates can fluctuate. Currently, the interest rates are historically low, but that does not mean it can’t go up to 10% (in fact it happened in GFC)
  • Banks use P&I over 30 years basis whether your loan is on Interest only or not. Your income needs to work on the P&I basis as the interest-only period is normally only 5 years.
  • Please note for existing lending, some banks such as BNZ works off residual loan terms as opposed to over 30 years meaning the existing loan commitments are higher in bank’s view and leaving less surplus for you to borrow more loans.
  • The banks only consider 75% of the gross rent as a rough guide to take into account vacancy and operating expenses.

The above should give you some insights into how banks assess the debt servicing and help you better plan and set strategies. 


We initially approached Connie regarding our home loan refinance because my wife normally worked during daytime but I worked at night shift for 3 days a week. It was not convenient for us to go to bank directly.

Connie went to our house during night time where both of us were available to review our existing home loan and discuss our financial goals. She sorted everything for us with a breeze. We were not only successfully refinanced existing home loan and secured very good interest rates and cash rewards but she also managed to help us finance our first rental property without any cash deposit by leveraging our home equity which we were not aware of before. She also gave us great advice on how to manage our home loan so they can be paid off quicker and build wealth through property investment.

We definitely recommend Connie because her knowledge, experience and expertise in finance gave us peace of mind. She is always there to help us and keep us updated regarding our home loans.


Jose and Marilou Suerte

Proud parents of two lovely children