What are your obligations?
As a broker, you must complete a thorough assessment to ascertain if a customer can adequately service the debt. It does not require you to strictly adhere to APRA’s guidelines. However, you do need to ensure that you are performing the preliminary serviceability assessment using your own calculator because you need to be able to justify the outcome and explain the arithmetic that was used to ascertain if a customer could adequately service the debt.
This means that a lender’s servicing calculator should not be used to complete your preliminary assessment as it will not provide justification for you under NCCP due diligence requirements.
If you conduct your own preliminary assessment completely independent of the lender, then obviously it is going to have a very different outcome to the serviceability assessment completed by the lender. Therefore, unless you are able to explain the mathematics of your client’s ability to fit repayments into their life, you are not complying with the legislation.
How do you adhere to this mandatory obligation?
Connective has implemented the Connective compliance calculator that is included in every borrowing capacity calculation.
The Connective Compliance Calculator will be displayed in the list of lenders within the Borrowing Capacity calculation
This calculator will be pegged to the top of the list to ensure it is front and centre.
The following outlines the sequence of calculations used to determine the loan amount;
- Calculate Monthly Living Expenses
By default this is derived from the matrix used by the Connective Home Loans calculator. However we recommend that brokers do an independent assessment on their clients and include this in the calculation.
- Calculate Gross Income
This is the sum of taxable, non-taxable and rental income across applicants.
- Calculate Net Income
This is gross income (2), minus income tax and the Medicare levy. The income tax is calculated using standard tax brackets, and the Medicare levy is 1.5% of gross income.
- Calculate Surplus Monthly Income
This is simply Net Income (3) minus all expenses (Living (1) and general).
- Calculate Loan Amount
The loan amount is calculated as a function of Surplus Monthly Income, Assessment Rate, and Loan Term. This calculation simply takes the Surplus Monthly Income as a monthly repayment and extrapolates to a loan amount.
Note: that for this purpose the default assessment rate is derived from the Connective Home Loans calculator and the loan term is set to 30 years.
If the borrowing capacity is sufficient for your client’s requirements and objectives then you can proceed as normal. If the borrowing calculator falls short of the client’s requirements then you must add a file note to mercury as to why the client is able to service a higher borrowing amount.