Common Mistakes When Applying for a Home Loan

What Lenders Actually Look At When You Apply

Serviceability assessment is how lenders decide whether you can afford to repay a home loan over the life of the contract. They calculate your income, subtract your expenses and existing debts, then apply a buffer to make sure you could still manage repayments if interest rates rose by around 3 percentage points above the loan product rate.

The buffer is set by the Australian Prudential Regulation Authority and applies to every bank and credit union regulated under the prudential framework. It means that even if you're applying for a variable rate at 6%, the lender tests your capacity to service that loan at around 9%. The reason for this is straightforward - lenders need to know you can afford the loan in a higher rate environment, not just at today's rates.

Your income matters, but so does how consistently you earn it. A lender will verify base salary, overtime, bonuses, rental income, dividends, and any other source you declare. They look at payslips, tax returns, rental statements, and bank statements to confirm the figures match. If your income fluctuates, they typically average it over a period of time or discount it by a percentage to account for variability.

Consider a buyer who earns a base salary of $85,000 and receives overtime averaging $12,000 a year. Some lenders will include the full overtime amount if it's been consistent for at least two years. Others might include only 80% of it, or exclude it entirely if the pattern is irregular. That difference can change your borrowing capacity by tens of thousands of dollars, which is why working with someone who knows how each lender treats different income types can save time and disappointment.

Living Expenses and the Household Expenditure Measure

Lenders don't just take your word for how much you spend each month. They use the greater of your declared living expenses or a benchmark figure called the Household Expenditure Measure, which is based on Australian Bureau of Statistics data and adjusted for household size, income, and location.

If you declare $2,000 a month in living costs but the HEM for a single person in Melbourne on your income is closer to $2,800, the lender will assess you at the higher figure. They also add your actual committed expenses on top of that benchmark, things like car loans, credit card limits, personal loans, child support, school fees, and other ongoing debts.

One area that catches people off guard is credit card limits. Even if you pay your card off in full each month, lenders assume you could draw down the entire limit at any time. A credit card with a $15,000 limit might reduce your borrowing capacity by $50,000 or more, depending on the lender's assessment rate. If you're not using the full limit, it's worth reducing it or closing accounts you no longer need before you apply.

How Recent Debt-to-Income Limits Affect Some Borrowers

From February 2026, APRA introduced a limit that restricts how many new loans banks can write to borrowers with a debt-to-income ratio of six times or higher. The limit applies separately to owner-occupier and investor lending, and it means that if your total debt is six times your annual income or more, you're now part of a quota that each bank must manage on a quarterly basis.

This doesn't mean you can't borrow at that level. It means the bank has a finite number of high DTI loans it can approve each quarter, so competition for those approvals has increased. If you're close to the threshold, some lenders may choose not to proceed, while others will assess your application on its merits and decide whether to allocate one of their available places to you.

In practical terms, a buyer earning $120,000 a year who wants to borrow $720,000 or more will be assessed under this framework. If you're in that position, your application needs to be particularly well presented. Lenders will look at your savings history, employment stability, the size of your deposit, and whether you have any margin in your budget after the serviceability buffer is applied.

The Three Per Cent Buffer and Why It Exists

The serviceability buffer was lifted from 2.5 to 3 percentage points in late 2021 and has remained at that level. It's not a margin the lender keeps or a rate you'll actually pay. It's a test to make sure you can still afford your repayments if rates rise after you settle.

If you're applying for a loan at a variable rate of 6.2%, the lender will assess your capacity to service that loan at around 9.2%. For a $600,000 loan over 30 years, repayments at 6.2% are roughly $3,680 a month. At 9.2%, they climb to around $4,900. The lender needs to see that your income, after tax and after all your expenses, can cover that higher figure with some room to spare.

This is one reason why borrowers sometimes find they can't borrow as much as online calculators suggest. The calculators typically don't apply the full assessment rate, the HEM, or the specific expense treatment each lender uses. They give you a rough idea, but the formal assessment is more conservative.

What Happens When Income Is Irregular or Commission-Based

If you're self-employed, on a contract, or earn a significant portion of your income from commission or bonuses, lenders will ask for additional documentation and may apply a discount to your income when calculating serviceability.

For self-employed borrowers, most lenders require two years of tax returns and either financials prepared by an accountant or a notice of assessment from the ATO. They look at your net profit after business expenses, not your turnover. If your income has been trending down, or if you've only been operating for a short time, some lenders won't proceed. Others have programs designed for newer businesses, particularly if you were previously employed in the same industry and can show continuity of income.

Commission and bonus income is usually averaged over two years, and some lenders will only include a portion of it. If you've recently changed jobs and your commission structure is different, the lender may exclude that income entirely until you have a consistent track record in the new role. This is one area where home loan pre-approval from a lender familiar with your industry can make a material difference to the amount you're able to borrow.

Preparing Your Application Before You Start Looking

Once you know what lenders assess, you can take steps to improve your position before you apply. Reduce or close credit card limits you're not using. Clear short-term debts like personal loans or buy-now-pay-later accounts if you can afford to. Make sure your savings are visible in your bank statements, ideally over a three-month period, and avoid large unexplained deposits or transfers that might raise questions during verification.

If you have existing debts, check whether refinancing or consolidating them would lower your monthly commitments. A car loan with 18 months remaining might not seem like much, but it reduces your serviceability just as much as a loan with five years to run. Paying it out before you apply could lift your borrowing capacity enough to make a difference, particularly if you're near the upper limit of what a lender will approve.

It's also worth reviewing your spending in the months before you apply. Lenders look at your transaction history to verify your declared expenses, and they'll question patterns that don't match. If you've declared $1,500 a month in living costs but your account shows $3,000 in discretionary spending, the lender will adjust your assessment accordingly.

How Different Loan Structures Affect Serviceability

The type of home loan you apply for also affects how the lender assesses you. An interest-only loan is assessed at a higher rate than a principal and interest loan, because the repayments don't reduce the debt during the interest-only period. Some lenders limit interest-only lending to investors, while others allow it for owner-occupiers in specific circumstances.

A split loan, where part of the debt is on a fixed rate and part on a variable rate, is assessed at the blended rate plus the buffer. If you're applying for a loan with an offset account, the lender doesn't assume you'll keep money in the offset when calculating serviceability, even though doing so would reduce your effective interest cost. The assessment is based on the full loan amount at the assessed rate.

If you're considering investment loans alongside an owner-occupied loan, lenders assess them together. Rental income can be included, but most lenders apply a discount of 20% to account for vacancy, maintenance, and management costs. If the property is negatively geared, the shortfall is treated as an additional expense and reduces your capacity to service other lending.

When to Get Professional Help with Your Application

If your situation is anything other than a single full-time job, no dependents, no existing debts, and a 20% deposit, the differences between lenders become material. Policy varies on how they treat overtime, rental income, second jobs, parental leave, probation periods, visa status, and previous credit events. Some lenders are more flexible with self-employed income. Others have higher tolerance for high LVR lending or will accept guarantors where most won't.

Knowing which lender to approach, and how to present your application, is what a broker does. We work with you to gather the right documents, structure the loan appropriately, and submit your application to a lender whose policy fits your circumstances. That means fewer declines, less time spent resubmitting, and a better chance of approval at a rate and loan amount that works.

Call one of our team or book an appointment at a time that works for you. We'll walk through your situation, explain what lenders will look for, and help you present your application in the most effective way.

Frequently Asked Questions