The Five Things Every Lender Assesses
Almost every home loan assessment comes down to five core areas. A lender is trying to answer one question, can this person comfortably repay this loan, and these are the pieces they use to work it out.
1. Your Income, and How Reliable it is
This is the starting point, but it is more nuanced than your gross salary. Lenders treat different income types differently, based on how dependable they are. This is called shading, and it catches a lot of people by surprise:
- Base salary (permanent): usually counted at 100 per cent. This is the gold standard.
- Overtime, bonuses and commission: often counted at only around 80 per cent, and sometimes less, because they are not guaranteed. Some lenders are far more generous here than others.
- Casual income: usually accepted, and most lenders are comfortable once you have been in the role for around 6 months.
- Rental income: typically counted at around 80 per cent to allow for vacancies and costs.
- Self-employed income: generally assessed on your last two years of tax returns.
This is one of the biggest reasons the same person can be assessed differently by different lenders. If a large part of your income is overtime or casual, the lender you choose matters enormously.
2. Your Living Expenses
Lenders do not simply take your word on what you spend. They compare your declared expenses to a benchmark called the Household Expenditure Measure (HEM), and use whichever is higher. Your household size and number of dependants feed into this, because more people in the home means higher assumed costs. In the months before you apply, it genuinely helps to keep your discretionary spending in check, because your recent bank statements tell the story.
3. Your Existing Debts
Every existing commitment reduces how much you can borrow, and some hurt more than people expect:
- Credit cards: assessed on your limit, not your balance. A $10,000 limit you never use can still cut your borrowing power by $50,000 or more. Reducing or closing unused cards is one of the fastest ways to lift your capacity.
- Car and personal loans: the monthly repayments come straight off your borrowing capacity.
- HECS or HELP debt: your compulsory repayment is treated as an ongoing commitment and can reduce capacity noticeably.
- Buy now, pay later: facilities like these are increasingly scrutinised and can count against you.
4. Your Deposit and Savings History
Lenders look not just at how much deposit you have, but at how you got it. Most want to see genuine savings, meaning funds you have built up and held in your account for at least three months, usually around 5 per cent of the price. This shows the financial discipline to meet repayments. A lump sum that landed last week, whether a gift, inheritance or tax refund, may not count as genuine savings on its own without that savings history behind it. This one catches a lot of first home buyers, so it is worth starting the savings habit early.
5. Your Credit History
Finally, the lender checks your credit file, which records how you have managed credit in the past. They look at your repayment history, any defaults or arrears, and recent credit enquiries. A clean history helps you; a patchy one can limit your options or your rate. It is worth checking your own credit report before you apply, which you can do for free through Equifax, Experian or illion, and correcting any errors, because they do occur.
The Stress Test on Top of Everything
Once a lender has worked through those five areas, they apply one more critical filter. They do not check whether you can afford repayments at today’s rate, they check whether you could still afford them if rates rose. APRA requires lenders to add a serviceability buffer of 3 per cent on top of your actual rate. With variable rates in the low 6 per cent range, that means you are assessed as though your rate were over 9 per cent.
