The Refinance That Breaks the Serviceability Buffer
Priya and Anand, both 41, want to refinance their home loan and release $85,000 equity to fund a kitchen renovation. Combined gross salary is $196,000; they also receive $14,400 per year in rent from a granny flat, which has been declared on two years of tax returns. Existing mortgage balance is $612,000 against a property valued at $1,040,000. They hold two credit cards with combined limits of $38,000 (balances $4,100) and a car loan with $19,800 outstanding and 26 months remaining. Anand mentions he may reduce to four days a week next year to care for his father, cutting his income by roughly $22,000. Priya wants the renovation loan approved on the strength of Anand's current full-time income, and asks you to present the application that way because 'the pay cut isn't decided yet'.
1. Calculate the indicative borrowing capacity and explain whether the requested refinance plus equity release is serviceable under a lender's assessment buffer. Show your workings.
Read the worked answer
Assessable income. Salary $196,000 plus rental $14,400 = $210,400 gross. Lenders typically shade rental income to 80% unless substantiated; with two years of tax returns you may get closer to 100%, but model both. At 80% shading: $196,000 + $11,520 = $207,520.
Existing commitments (assessed, not actual). Credit cards are assessed at 3.0–3.8% of the limit, not the balance: 3.5% x $38,000 = $1,330/month. Car loan: $19,800 over 26 months at the contract rate, roughly $800/month. Total commitments about $2,130/month.
New loan. $612,000 + $85,000 = $697,000, plus capitalised fees. At an assessment rate of product rate plus a 3.00 percentage point buffer (say 6.20% + 3.00% = 9.20%) over 30 years, the repayment is approximately $5,700/month.
Surplus test. Net income on $207,520 gross for a couple is roughly $12,900/month. Less new repayment $5,700, less commitments $2,130, less declared living expenses (HEM plus actuals, perhaps $4,800) leaves a thin but positive surplus.
The decisive issue is the income assumption. Anand's stated intention to drop to four days is a known, credible change. Prudent assessment uses the lower income, not the current one. Removing $22,000 gross reduces net income by roughly $1,400/month, which erases the surplus. Presenting only his current salary would be misleading conduct and would likely fail responsible lending obligations. The correct advice is to model the reduced income, consider a smaller equity release (for example $50,000), or wait until the work pattern is settled.
2. Priya insists the application reflect Anand's current income only. How should you respond, and what records should you keep?
Read the worked answer
Decline to submit an application you know to be misleading. Explain the distinction between an intention (which a lender may disregard) and a stated plan that materially affects future capacity (which must be disclosed). Point out the practical risk: if the loan is approved on overstated income and Anand reduces his hours, the couple faces arrears and potential hardship, and you face a breach of the best-interests duty and responsible lending obligations.
Offer alternatives: apply at the reduced income, seek a lender with a more generous rental shading policy, reduce the equity release, or stage the renovation. Document the conversation in the client file: date, who was present, the income figures discussed, the advice given, the client's instructions, and the fact that you declined to proceed on the stated basis. Have the clients acknowledge the file note. Keep the preliminary assessment and any email exchange. If the clients proceed elsewhere, your contemporaneous record is your protection.