When it comes to getting a home loan, it’s helpful to think like a lender. Each bank has a unique home policy and ways they assess risk so it’s important to have lots of different banks to choose from to find the right one that will work with you.
Banks are pretty risk-averse.
When a bank is deciding whether or not they want to give you your money, all they really care about is: Can you pay now, can you pay later, and do you have proof?
The banks look at things like your employment history, consistency of your income, other debts you might have, and savings to assess if they will lend you the money or not.
Every lender uses the same fundamental criteria when looking at your loan application, and this includes what they call the 5Cs of credit.
The Five Cs of credit is the most basic test of the creditworthiness of potential home buyers. Here are its core components:
Tip: If you are thinking about switching jobs in the future, the bank will ask about gaps in your employment history or a reduction in income over the past few years. If you’re currently in the loan application process, it’s best not to change jobs if you can avoid it as it could impact your ability to get financing even after you’ve been approved.
Your credit score can impact your borrowing if you have had issues in the past with missed repayments.
A home loan is something you are committing to for years, if not decades. The average loan term is 20 to 25 years, so the banks want to make sure that you will be able to continue to make payments in the future.
To work this out, the banks will look to see if your income has been stable and constant over the past one to two years and if it’s likely to continue. They will typically want to see some documentation of your income history, like group certificates and payslips.
If your income is variable, for example, if you are self-employed or paid a commission, you may need to submit some extra documentation and be prepared for some banks to be slightly conservative in their income calculations. Also, keep in mind that not all income is considered equal. For example, banks will typically only count 75-80% of rental income, as it is considered riskier than employment income.
I will show you how to get a more accurate idea of what you can afford and what your repayments will be, but as an estimate, the banks will lend you around five to six times your gross annual salary.
This is your annual salary before tax, not including superannuation or any other bonuses.
The acceptable job statuses of preferred borrowers are as follows:
Some banks love, and some banks hate secondary income from jobs like Uber
If the duration of employment is met, 100% of the borrower’s income will be accepted for review by the lender. Below are the income types that might be fully accepted—subject to certain conditions.
