Understanding How Banks Assess Your Home Loan Application

When applying for a home loan, most people focus on the interest rate — but that’s only one piece of the puzzle. Behind the scenes, every lender follows a detailed process to decide whether to approve your loan and how much you can borrow. Here’s a simple breakdown of what really happens.

Your Income and Employment

Lenders want to see stable, reliable income. They’ll usually check:

• Your last two pay-slips if you’re PAYG (employed)

• Tax returns and financials if you’re self-employed

• Any extra income such as rent, bonuses or overtime

💭 Tip: Consistent work history in the same field helps. If you’ve just changed jobs, some lenders may still accept it — but they’ll want to see a letter of employment or probation details.

Your Expenses and Debts

Even if you earn well, lenders will look at your living expenses and existing debts — credit cards, car loans, After pay etc. They’ll calculate your “net disposable income” to check if you can comfortably manage repayments after your regular costs.

💭 Tip: Close unused credit cards and reduce personal loans before applying — every liability affects your borrowing capacity.

Your Credit Score

A good credit score shows you’ve managed debt responsibly. Missed payments, defaults, or too many credit enquiries can reduce your score.

💭 Tip: You can get a free credit report from Equifax or illion before applying — fixing small issues early can make a big difference.

Your Deposit and LVR

Your deposit determines how much of the property you own from the start. If you’re borrowing more than 80% of the property’s value (called a Loan-to-Value Ratio, or LVR), lenders usually charge Lenders Mortgage Insurance (LMI).

💭 Tip: A 20% deposit avoids LMI, but many lenders have low-deposit options if your overall profile is strong.

Your Security (the Property)

Lenders also look at the property itself — location, type, and market value .Unusual properties (like very small units, rural land, or serviced apartments) can be harder to finance.

💭 Tip: If you’re unsure whether a property is “bank-friendly,” ask your broker before signing a contract.

Your Buffers and Future Changes

Banks test your ability to repay at a higher rate than what you’re applying for — usually 2–3% more. This is called the serviceability buffer and protects both you and the lender from rate rises.

💭 Tip: Always leave room in your budget. Don’t borrow right up to your maximum limit.

The Bottom Line

Getting a home loan isn’t just about income or rate — it’s about the whole picture. Strong savings habits, stable income, sensible spending and good credit history all help you qualify for a better deal.

If you understand how lenders think, you can prepare smarter — and make the process a lot smoother.