Pepper Money responds to headline concern of serviceability

This article was produced in partnership with Pepper Money

Bennett Richardson of Mortgage Professional Australia asked Barry Saoud, GM at Pepper Money, to discuss how brokers can help borrowers to boost their serviceability

The serviceability test is at the core of applying for a home loan and it’s under the spotlight more than ever.

“It's the lenders way of assessing how big a loan your client can afford to repay overtime,” says Pepper Money’s general manager for mortgages and commercial lending Barry Saoud.

“One of the key inputs is the interest rate your client will be tested on. Obviously, the higher the rate, the more the borrower will be paying in interest, and this can reduce the total loan amount they qualify for,” he says.

Given the Reserve Bank of Australia (RBA) recently found that some households are experiencing financial stress from higher interest rates and inflation, a squeeze on household budgets is likely to continue for some time.  This is an economic contraction that can see some homeowners trapped in their current mortgage because they lack the equity or serviceability to refinance. 

What can brokers do to help customers increase their serviceability?

Saoud explains: “There’s been a lot of focus solely on serviceability assessment buffers – and while we agree with industry consensus, that some borrowers could be assessed on a lower rate – it can’t be the only way to support clients with their overall serviceability. Which is why we have been developing a range of policies that work together to provide customers with options to get through.

“In times of uncertainty borrowers need extra support to help them navigate. Additional policy levers are required to deliver on this. By providing options on length of term and capping repayments as we have here at Pepper Money – brokers are able to give these customers the bridging relief they need to get through these times,” he says.

“The key driver here is to keep customers in their homes – offering help in a pragmatic and real-life way.

“The Pepper Money view on this market is that for some people in certain situations, what they need is a temporary solution, offering the support they need until the environment stabilises, or until the client’s circumstances improve.”

Options to consider when looking to help clients

Saoud lists the following five points as items to focus on:

1. Income: It sounds obvious, a higher income directly improves serviceability. But brokers should proactively be talking to their clients about exploring opportunities for salary increases, bonuses, promotions, or additional income streams such as part-time work or freelance gigs. All income streams should be considered even things like Centrelink payments. Non-bank lenders like Pepper Money consider a broad range of acceptable income types and allowances.


2. Reduce existing debt: Lowering existing debt obligations can improve your client’s serviceability position. Borrowers can focus on paying off high-interest debts or consolidating multiple debts into a single loan. So instead of repaying individual debts with different interest rates and fees for mortgages, cars, credit cards, personal loans and even phone bills, your client can have just one ongoing repayment to manage each month – which may help save you time and money.


3. Stretch the loan term: Extending the loan term reduces the monthly repayment amount, making it more manageable. At Pepper Money, we are one of the few lenders in the country that can offer clients a 40-year loan term. However, keep in mind that longer loan terms may result in higher overall interest costs. When your client is in a better situation, you could encourage them to try to pay more than the minimum repayments to potentially reduce the extra interest cost or refinance later.


4. Consider a co-borrower: Having a co-borrower with a strong financial position can increase your client’s serviceability. The collective income and assets of both applicants will be considered when assessing the borrower's ability to repay the loan. They have an equal responsibility in ensuring that the repayments are made, and therefore will assist with the loan serviceability. It goes without saying, both borrowers will need to be assessed for loan suitability and their capacity to contribute to the loan repayments.


5. Give it the non-bank test: Pepper Money has the flexibility to make lending for all kinds of real-life situations possible. We’ve always been passionate about providing solutions – particularly in the more complex specialist lending category, where people are doing it toughest. If we can find a way to help, we will. We are constantly uncovering ‘yes’s’ when there are ‘no’s and we keep testing the boundaries.

“Remember that each borrower's circumstances are unique, and it's important to consider the long-term implications of any changes to serviceability. It's advisable to seek professional advice and thoroughly evaluate the potential impact before implementing any strategies,” says Saoud.

Pepper Money’s serviceability solutions:

• Up to 40-year loan terms
• Fixed rates – no break costs
• Real life refinance policy (for eligible customers)
• Up to 85% lend with no LMI/Risk fee (Prime customers)
• Negative gearing considered for investor customers
• No limit to number of debts to consolidate; including business and tax debt
• No limit to cash out (subject to LVR and lending limits)
• Broad range of acceptable incomes
• Up to 5 years interest-only

“Talk to your Pepper Money BDM to find a serviceability solution for your client. We make it easy. Our Pepper Product Selector can give you an indicative response in under five minutes and we have an accessible credit team who are always ready to workshop any scenarios.”

Barry Saoud joined Pepper Money in July 2021 as general manager, mortgages and commercial lending and is responsible for the strategic direction and operating performance across product, credit, and settlements sales functions for Australia and New Zealand mortgages, commercial loans, personal loans, and direct sales.