How do mortgage lenders assess applications?
Dominic Beattie
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- Lenders will look at your income, expenses, existing debts, and credit history before deciding whether or not to write you a loan.
- A serviceability buffer might also apply (most commonly 3%) which is added on to your interest rate when assessing the application.
- Many lenders also have floor rates and maximum debt-to-income or loan-to-value ratios.
The lending assessment process varies between institutions, but there are some key criteria most lenders use when deciding whether or not to write a home loan . We've broken down what a lender will ask for from you and why, and what will inform its ultimate decision to approve or reject you.
Savings.com.au's two cents
It can be extremely frustrating to have your loan application rejected because of a bank's lending criteria. However, responsible lending is crucial to the stability of our economy. Loans are usually a bank's largest asset, so if it is forced to write off too many because customers can't repay them, it might run into problems meeting liabilities. This could put the whole financial system at risk.
How lenders assess home loan applications
Identity documents
Lenders will generally require basic identity documents that show you are who you say you are, and will make it easy to track you down if you stop paying your loan. Examples might include:
- Driver's licence
- Passport
- Medicare card
Home loan serviceability
Your lender will also consider your income and living expenses to work out whether or not you can afford the loan. The Household Expenditure Measure (HEM) is an important benchmark that lenders use to assess expenses.
Income
If you are an employee, demonstrating your income is as simple as a few payslips.
Self-employed borrowers may need to provide more evidence of their income, like tax returns or financial statements for their business. In some cases this can make it harder to be accepted for a loan.
Read more: Self-employed home loans
Biggest mistake when applying for a home loan
The biggest mistake I see is buyers assuming a strong income equals an automatic approval. Today, it’s about the full picture: income, debts, spending habits and how the lender’s policy fits your scenario.
Expenses (Household Expenditure Measure)
When assessing expenses, many lenders use the Household Expenditure Measure (HEM) alongside your expense history. This is a formula that estimates a minimum monthly expenditure for a given household. It takes into account age, location, number of dependants, and standard of living, among several other things.
When you apply for a home loan , you will need to submit your income and expenses over a given period. Your lender will come up with an average monthly expenditure based on this. When it assesses your application, it will typically use the higher out of this figure or the number generated by the HEM.
Serviceability buffers
Lenders also 'stress-test' mortgage applications, applying a buffer to make sure borrowers will still be able to repay the mortgage at a higher rate. APRA currently enforces a 3% serviceability buffer . That means if you are applying for a loan at 5% p.a., your lender will generally be testing whether you could repay the loan at 8% p.a.
Do all lenders apply the 3% buffer?
Non-bank lenders don't have to follow the APRA buffer, with many using a lower stress test (2% for example).
Some banks also have relaxed serviceability tests for certain refinancing applicants. For example, Commonwealth Bank sometimes drops the buffer to 1% for borrowers with a HECS/HELP debt due to be repaid within five years.
Read more: Commbank eases HECS restrictions
Floor rates
Many banks also have their own floor rate that they will assess the loan against. If the serviceability adjusted rate is less than the banks floor rate, the loan will be assessed against the floor rate instead.
For example, say a bank has a floor rate of 6% p.a. and a borrower is applying for a loan at 2.5% p.a.. The serviceability adjusted rate would be 5.50% p.a. - less than the floor rate - so the bank would only write the loan if the borrower could demonstrate ability to repay the loan at 6% p.a.
Creditworthiness
Your lender will also do its due diligence on your credit history to see how you've gone with previous bills and debts. Even if you can demonstrate a strong income, a chequered history of unpaid bills or debts you've defaulted on is likely to raise red flags, and your application could be referred to the lender's credit department for a more in-depth assessment.
Read more: Can I refinance with bad credit?
Advice for prospective homebuyers
- Clean up the silent killers early. Reduce credit card limits, clear BNPL and personal debt, and avoid applying for new credit in the 3 to 6 months before applying for a home loan.
- Be deliberate with your spending for a few months. You do not need to live like a monk, but consistent savings and clean conduct makes approvals smoother.
- Use lender policy to your advantage. Different banks treat the same borrower very differently, especially around overtime, bonuses, allowances, HECS and dependants.
What makes a loan riskier for a lender?
Deposit size and LVR
Lenders prefer a lower loan-to-value ratio (LVR) as high LVR borrowers are at a higher risk of falling into negative equity . Lenders may be less likely to approve high LVR loans and may charge higher rates compared to borrowers with a bigger deposit.
An LVR of 80% is usually the benchmark below which lenders won't require borrowers to pay for Lenders Mortgage Insurance (LMI) to compensate for that risk. High LVR loans also
What is LVR?
LVR refers to how big the loan is relative to the size of the asset used as collateral. It is a means to assess the risk of negative equity (where the loan balance exceeds the value of the asset), which could result in the lender making a loss in the event of a default.
Imagine you take out a loan of $900,000 to buy a property for $1,000,000. This would make your LVR 90% (900,000/1,000,000 x 100). Now imagine after one year, you have paid off $40,000, so you have an outstanding loan amount of $860,000. At the same time, the property market has dropped and the property is now only worth $800,000. Should you now default on your repayments, and the bank repossesses the property, it will make a loss, since it is owed $860,000 and will not be able to recoup this full amount by selling the property.
Riskier suburbs
Some lenders may impose a lower LVR limit on property in more risky areas. Mining towns, for example, where demand can fluctuate wildly, might be deemed more likely to run into negative equity positions, and thus lower LVR thresholds might be imposed.
Debt-to-income ratio
Lenders also often consider an applicant's debt-to-income ratio (DTI) or how big total debts are relative to annual income.
Let's say you have $400,000 outstanding on a home loan, and $50,000 on your car, and your annual salary is $100,000. Your debt-to-income ratio would be 4.5, since your total debts are 4.5 times bigger than what you earn in a year.
- From February 2026, banks regulated by APRA won't be able to have more than 20% of new mortgage lending at a DTI of 6 or more.
How to improve your chances of getting approved for a mortgage
Some key steps to improve your mortgage approval chances include:
- Strengthening your credit score - Pay bills on time, reduce outstanding credit card balances, review your credit report and take other steps to improve your credit score and show that you manage your debt responsibly.
- Lower your DTI - As mentioned above, lenders will take a close look at your debt-to-income ratio so they know that you have enough income to handle additional mortgage payments.
- Save for a larger down payment - Put down more money for your down payment for a lower loan-to-value ratio, potentially better interest rates, and of course, reduced risk for the lender.
- Avoid major financial changes before applying - This isn't the time to take on large purchases, open new credit accounts, close longstanding ones, and make large unexplained deposits.
- Get pre-approved before house hunting - A mortgage pre-approval can help you reveal potential issues early, giving you enough time to correct them before submitting a full application.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner-occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
6.38% p.a. | 6.66% p.a. | $3,121 | Principal & Interest | Variable | $299 | $0 | 85% | |||||||||||||
6.23% p.a. | 6.23% p.a. | $3,072 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
