Beyond the interest rate
Getting approved for a home loan isn't just about finding the lowest interest rate. What many first-time homebuyers don't realise is that lenders have comprehensive assessment criteria that determine not only if you'll get approved, but also how much you can borrow and at what rate.
As mortgage brokers who've helped hundreds of millennials and young professionals secure home loans, we've developed insider knowledge of exactly what banks are looking for in 2025. This guide breaks down the complete assessment process so you can position yourself as an ideal borrower.
The four C's of credit assessment
Before diving into specific criteria, it's helpful to understand the fundamental framework lenders use to evaluate applications. This can be summarised as the "Four C's of Credit":
- Capacity - Your ability to repay the loan based on income, employment stability, and existing financial commitments
- Character - Your demonstrated financial responsibility through credit history and bill payment records
- Collateral - The property you're purchasing and its value as security for the loan
- Capital - Your personal financial assets, including savings, investments, and other resources
Now, let's explore the 12 specific factors lenders scrutinise when reviewing your application.
1. Income assessment: Not all income is treated equally
Your income is the cornerstone of your application, but how lenders assess different types of income varies dramatically:
- Regular salary income: The gold standard. Consistent full-time employment with regular paychecks will get the most favorable treatment.
- Commission and bonuses: Often discounted by 20-50% unless you can show a consistent multi-year history.
- Overtime and shift allowances: Many lenders will only count 50-80% of this income.
- Share-based compensation: Typically heavily discounted or sometimes entirely disregarded.
- Rental income: Usually assessed at 70-80% of actual income to account for vacancies and expenses.
- Government benefits: Many are excluded entirely, particularly temporary payments.
- Foreign income: Often severely discounted or disregarded depending on currency stability.
- Investment dividends: Usually only considered with a multi-year history of consistent payments.
Pro tip: Review a mortgage application check list and obtain a comprehensive income summary from your employer that clearly breaks down your base salary from other components to help your broker find the right lender for your income structure.
2. Employment stability: Consistency matters
Lenders favor applicants with stable employment history:
- Avoid job changes: Switching jobs shortly before applying is a classic mortgage application mistake and can significantly reduce your borrowing capacity.
- Probation periods: Many lenders will not approve loans for applicants still in probation periods.
- Employment tenure: Most lenders want to see at least 6-12 months in your current role.
- Casual positions: Often discounted by 20-40% or disregarded entirely.
- Side hustles and gig work: Usually given minimal weight unless you have a 2+ year history with consistent income.
Pro tip: If you're planning to change jobs, consider securing your home loan approval first, then making the career move.
3. Self-employment considerations: Extra documentation required
Self-employed applicants face additional scrutiny:
- Tax returns: Most lenders require two consecutive years of tax returns showing stable or increasing income.
- Business structure: Sole traders, partnerships, and company directors are assessed differently.
- Industry stability: Some lenders apply additional criteria based on your industry sector.
- Documentation: Business Activity Statements, profit and loss statements, and accountant declarations may be required.
Pro tip: The tax minimisation strategies that your accountant uses can work against you when applying for a loan. Consider this balance when planning your tax approach in the years before buying a home.
4. Savings history: Proving financial discipline
Your savings history demonstrates your ability to manage money:
- Consistent savings pattern: Regular deposits into savings accounts show financial discipline.
- Genuine savings: Most lenders want to see funds held or accumulated over at least 3-6 months.
- Gifted funds: While acceptable, most lenders still want to see some history of personal savings.
- Sudden lump sums: Large deposits shortly before application will require explanation and documentation.
Pro tip: Start a dedicated savings account with automatic transfers from your pay at least 6-12 months before applying for a home loan.
5. Deposit size: Lower LVR equals better terms
Your deposit affects your Loan-to-Value Ratio (LVR), a critical metric for lenders:
- 80% LVR threshold: Borrowing less than 80% of the property value typically unlocks better rates and avoids Lenders Mortgage Insurance (LMI).
- 95% LVR loans: While available, these come with higher rates and substantial LMI costs.
- Parental guarantees: Can potentially allow borrowing up to 100-105% but come with significant considerations for all parties.
- Grant eligibility: First home buyer grants and stamp duty concessions can effectively increase your deposit.
Pro tip: Even a small increase in your deposit can significantly reduce your LMI premiums. Ask your broker to show you LMI calculations at different deposit levels.
6. Spending habits: Bank statements tell your story
Lenders will scrutinise 3-6 months of bank statements to assess your spending:
- Regular discretionary spending: Frequent takeout, entertainment, and shopping may raise concerns.
- Buy-now-pay-later services: Heavy usage of Afterpay, Zip, and similar services can be red flags.
- Gambling transactions: Even recreational gambling can seriously impact your application.
- Account management: Overdrafts and dishonor fees suggest poor financial management.
- Living expenses floor: Lenders apply minimum living expense benchmarks based on household size and location.
Pro tip: Begin "living like you have a mortgage" at least 3-6 months before applying by reducing discretionary spending and establishing regular savings patterns.
7. Credit score and history: Your financial reputation
Your credit report provides lenders insight into your financial behavior:
- Payment history: Late payments, defaults, and missed obligations severely impact approval chances.
- Credit inquiries: Multiple loan applications in a short period can reduce your score.
- Credit utilisation: Using a high percentage of your available credit limits is viewed negatively.
- Court judgments and bankruptcies: These create significant barriers to approval.
- Credit score thresholds: While not the only factor, scores below 600 may trigger additional scrutiny.
Pro tip: Obtain your free credit report from all three major bureaus (Equifax, Experian, and Illion) before applying to identify and address any issues.
8. Asset position: What you own matters
Your overall asset position strengthens your application:
- Property assets: Existing real estate shows financial responsibility.
- Superannuation balance: A healthy super balance demonstrates long-term financial planning.
- Vehicle ownership: Particularly if owned outright rather than financed.
- Investments: Shares, bonds, and other investments show financial sophistication.
- Emergency funds: Savings beyond your deposit demonstrate financial resilience.
Pro tip: Provide a comprehensive list of assets with documentation, even for items not directly related to your loan application.
9. Existing liabilities: Your current debt obligations
Your existing debts significantly impact borrowing capacity:
- Credit card limits: The total limit (not just the balance) is assessed as potential debt.
- Personal loans: Outstanding balances reduce borrowing capacity.
- Buy-now-pay-later accounts: Increasingly being treated as credit facilities.
- Car loans: The remaining balance and payments are factored into serviceability.
- HECS/HELP debt: While treated differently from other debts, this impacts your take-home pay.
- Rental payments: Current rent is considered when assessing your ability to manage mortgage payments.
Pro tip: Consider reducing credit card limits and consolidating small debts before applying to maximize borrowing capacity.
10. Debt-to-income ratio: The new lending frontier
Regulatory focus on DTI ratios has made this metric increasingly important:
- DTI calculation: Total debt divided by gross annual income.
- Acceptable ranges: Most lenders prefer ratios below 6, with 7-9 being the typical maximum.
- Investment property impacts: Investment loans can dramatically increase DTI even when the rent covers repayments.
- Buffer requirements: Lenders stress-test your capacity at higher interest rates.
Pro tip: Work with your broker to calculate your DTI ratio early in the process to identify potential barriers.
11. Property considerations: Not all properties are equal
The property itself is a significant factor in loan approval:
- Property type: Houses typically receive more favorable treatment than apartments.
- Location: Properties in capital cities and regional centers are preferred over remote areas.
- Size and zoning: Very small apartments (under 50m²) or unusual zoning can restrict lending.
- Construction type: Non-standard construction methods may limit lender options.
- Concentration risk: Some lenders restrict lending in developments where they already have significant exposure.
Pro tip: Before making an offer, ask your broker if there are any lending restrictions associated with the specific property type or location.
12. Loan features: Matching products to circumstances
Different loan structures suit different borrowers:
- Fixed vs. variable rates: Your income stability and market outlook influence this choice.
- Offset accounts: Particularly valuable for high-income earners with cash reserves.
- Redraw facilities: Offer flexibility but sometimes with restrictions.
- Split loans: Combining fixed and variable portions to balance certainty and flexibility.
- Interest-only periods: More difficult to obtain but useful in specific investment strategies.
Pro tip: The lowest advertised rate isn't always the best option. Consider the total cost including fees and the suitability of features for your specific situation.
How to position yourself as an ideal borrower
Based on these 12 factors, here are practical steps to maximise your approval chances:
- Start early: Begin preparing your finances 6-12 months before applying.
- Consolidate accounts: Simplify your banking with fewer accounts and cards.
- Reduce credit limits: Lower unused credit card limits to improve borrowing capacity.
- Establish savings patterns: Demonstrate regular savings habits.
- Clear small debts: Pay off personal loans and store cards where possible.
- Maintain employment stability: Avoid changing jobs during the application process.
- Clean up spending: Minimise discretionary spending for 3-6 months before applying.
- Check your credit report: Address any errors or issues before lenders see them.
- Gather documentation: Prepare pay slips, tax returns, and statements in advance.
- Work with a broker: Let a professional match your profile to the right lender.
Conclusion: Knowledge is power in the home loan process
Understanding what lenders look for puts you in a stronger position when applying for a home loan. Rather than taking a scattergun approach and applying to multiple lenders (which can harm your credit score), work with an experienced mortgage broker who can match your specific situation to the right lender.
The home loan market in 2025 is more complex than ever, with each lender applying their own unique assessment criteria. What might be a deal-breaker for one lender could be perfectly acceptable to another. This is where professional guidance makes all the difference.
Ready to get started on your home loan journey? Contact our team for a no-obligation consultation to assess your borrowing capacity and develop a customised strategy to achieve your property goals.
