What Are Lenders Looking For?

When applying for a home loan in Australia, understanding what lenders are looking for can significantly improve your chances of securing a mortgage. Lenders assess various factors to determine your eligibility, interest rate, and borrowing capacity. While each lender has its specific policies, the key criteria remain largely the same. Here, we break down what lenders evaluate when assessing a home loan application.

1. Credit History and Score

One of the first things lenders check is your credit history and credit score. A strong credit score indicates responsible financial behaviour and a lower risk for the lender. Your credit score is influenced by:

  • Timely repayment of previous loans, credit cards, and bills
  • The number of credit applications you have made
  • Outstanding debts and defaults
  • Any bankruptcies or court judgments

A good credit score (typically above 700) will improve your chances of approval and potentially qualify you for better interest rates.

2. Income and Employment Stability

Lenders want to ensure you have a stable and sufficient income to repay your mortgage. They assess:

  • Your employment type (full-time, part-time, casual, self-employed)
  • Length of time in your current job
  • Industry stability
  • Consistency of income

Full-time employees with a steady income generally find it easier to secure loans. Self-employed applicants may need to provide extra documentation, such as tax returns and business financial statements, to prove consistent income.

3. Debt-to-Income Ratio

Your existing financial commitments play a crucial role in your borrowing power. Lenders calculate your debt-to-income (DTI) ratio by comparing your total debt to your income. A high DTI ratio may indicate financial strain, making it harder to get approved for a loan.

Typical financial commitments lenders assess include:

  • Credit card limits and balances
  • Personal loans and car loans
  • HECS/HELP debt
  • Existing mortgages or investment loans

Reducing unnecessary debts before applying for a mortgage can improve your DTI ratio and increase your borrowing power.

4. Deposit and Loan-to-Value Ratio (LVR)

Your deposit size directly affects the Loan-to-Value Ratio (LVR), which compares the loan amount to the property’s value. Most lenders prefer an LVR of 80% or lower, meaning you should ideally have at least a 20% deposit.

However, if your deposit is less than 20%, you may still get a loan but will likely need to pay Lenders Mortgage Insurance (LMI). Some lenders allow lower deposits (as low as 5%), but the risks and costs increase.

5. Genuine Savings

Lenders prefer borrowers who can demonstrate financial discipline by saving a deposit over time. Genuine savings typically include:

  • Money held in a savings account for at least three months
  • Term deposits
  • Shares or managed funds

Large one-off gifts or windfalls (e.g., an inheritance) may not count as genuine savings unless combined with evidence of consistent saving habits.

6. Property Type and Location

Lenders also assess the property you intend to buy. Certain property types may pose higher risks, leading to stricter lending conditions or lower loan amounts. Factors that affect lending decisions include:

  • Property location (regional vs metropolitan)
  • Property type (house, apartment, townhouse, etc.)
  • Size (some lenders have restrictions on small apartments)
  • Market demand and resale value

Unusual properties, such as studio apartments under 50 square metres or properties in high-risk areas, may require a larger deposit or have lending restrictions.

7. Serviceability Assessment

Lenders conduct a serviceability assessment to determine whether you can afford repayments under various scenarios, including potential interest rate increases. This includes:

  • Stress testing repayments at higher interest rates
  • Reviewing living expenses (food, utilities, transport, entertainment, etc.)
  • Evaluating discretionary spending habits

Lenders use different assessment rates, but they typically add a buffer of around 2-3% above the current interest rate to ensure you can manage repayments if rates rise.

8. Government Grants and Incentives

For first-home buyers, government schemes such as the First Home Owner Grant (FHOG) and First Home Guarantee Scheme can improve borrowing power. Lenders consider these incentives when evaluating your application, particularly if they help you meet deposit requirements.

How to Improve Your Chances of Approval

To increase your likelihood of securing a home loan, consider the following:

  • Check your credit score and address any issues before applying.
  • Reduce existing debts and avoid unnecessary credit applications.
  • Save a larger deposit to lower your LVR and potential LMI costs.
  • Maintain steady employment to show income stability.
  • Minimise discretionary spending in the months leading up to your application.

Final Thoughts

Understanding what lenders are looking for can help you prepare a strong mortgage application and improve your chances of approval. By managing your finances responsibly, demonstrating stable income, and minimising debt, you can position yourself as a low-risk borrower and potentially secure better loan terms.

If you’re unsure about your eligibility or want to explore your options, consulting a mortgage broker can be beneficial. Brokers have access to multiple lenders and can guide you through the process, helping you find the best home loan to suit your needs.

The Team at The Accountants and The Finance Brokers are here to help you navigate your cash flow requirements in your business. We offer complimentary cash flow reviews and assist you in understanding your finance needs.