How Banks Decide on Your Home Loan

How Banks Size You Up

When you apply for a mortgage, the bank’s goal is to work out one big question: can you comfortably repay this loan even if things change?

They look at a mix of your income, spending, debts, credit record and savings habits. Here’s what’s on their checklist:

1. Your Income and Job Stability

Steady income gives banks confidence that you’ll keep up with repayments. Full-time or permanent part-time work is ideal, but casual and self-employed workers aren’t ruled out, they just need more proof of consistency, like two years of tax returns or business financials.

If you’ve recently switched jobs but stayed in the same industry, that usually doesn’t hurt your chances. What banks don’t like is long gaps between jobs or income that fluctuates wildly.

2. What You Spend and What You Owe

Banks go through your spending habits line by line. They’ll look at your essentials such as rent, groceries, bills, and your discretionary spending like streaming subscriptions, dining out and shopping.

They’ll also check for any debts: personal loans, car finance, credit cards or Buy-Now-Pay-Later accounts. Even if you never use a credit card, a high credit limit can still count against you because it’s potential debt.

3. Your Credit Record

A clean credit history shows you’re reliable with money. If you’ve made repayments on time and avoided defaults or multiple loan applications, that’s a tick in your favour.

You can improve your score by paying bills early, lowering credit card limits and closing unused accounts.

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

Your deposit shows how much skin you’ve got in the game. Lenders compare the amount you want to borrow to the property’s value, this is your loan-to-value ratio.

For example, if you’re buying a $700,000 home and you’ve saved $140,000, your LVR is 80%. That’s the sweet spot most banks prefer. If your deposit is smaller, you can still get a loan, but you’ll likely need to pay Lenders Mortgage Insurance (LMI) – a one-off cost that protects the bank, not you.

5. The “Stress Test”

Even if you can manage repayments now, banks test whether you could handle higher rates. This “serviceability buffer” is usually around 3% above the loan rate.

So, if you’re applying for a 5.5% loan, they’ll check you can still afford it at 8.5%. It’s a safety measure to stop borrowers from getting in over their heads when rates rise.

Example: How Borrowing Power Is Worked Out

Let’s imagine you earn $95,000 a year before tax (roughly $6,000 a month after tax).

You spend around $2,500 a month on living costs and have a $400 monthly car loan. That leaves about $3,100 free for repayments.

When banks run the numbers using their buffer rates, they might decide you can borrow roughly $540,000–$580,000.

But here’s the catch: that’s a maximum. Borrowing to the limit can leave you with no breathing room for rate rises, kids, travel, or an unexpected bill. A safer bet is to stay below your ceiling.

How to Work Out What You Can Afford

While banks assess what’s safe for them, you need to decide what’s realistic for your lifestyle. Here’s how to do it.

1. Use a Borrowing Power Calculator

Every major bank, like CommBank, NAB, Westpac and ANZ, offers free online calculators that estimate how much you could borrow based on your income and expenses.

They’re a handy starting point, but treat the result as a range, not a target.

2. Don’t Forget the Upfront Costs

Buying a home isn’t just about the deposit. You’ll also need to budget for:

• Stamp duty (unless you qualify for a concession)

• Legal and conveyancing fees

• Building and pest inspections

• Loan setup or valuation fees

• Insurance and moving costs

Together, these can add up to 3–5% of the property price. Having this buffer saved upfront keeps you from dipping into your emergency fund.

3. Crunch the Repayments

Most lenders let you plug numbers into a home loan repayment calculator. Try different interest rates and loan terms to see how the repayments change.

As a guide, aim to keep repayments under about 30% of your gross income. If you earn $95,000 a year, that’s around $2,375 per month. If rates rose 1–2% tomorrow, would you still be comfortable? If not, it might be time to lower your target price.

4. Keep an Emergency Cushion

After settlement, it’s wise to keep at least three months of living expenses aside. Home ownership comes with surprises, from leaking roofs to rising rates, and that safety net can make all the difference.

Help for First-Home Buyers

Getting into the property market can feel out of reach, but there are several Australian government programs designed to help.

First Home Owner Grant (FHOG)

A one-off grant for eligible buyers of new homes. The amount varies by state (generally between $10,000 and $30,000) and can be used toward your deposit or costs.

First Home Guarantee

This allows you to buy with as little as a 5% deposit without paying LMI. The federal government guarantees part of your loan to cover the gap.

First Home Super Saver Scheme

Lets you make voluntary contributions to your super fund (up to $50,000) and later withdraw them for your first home deposit. It’s a tax-smart way to save faster.

Stamp Duty Concessions

Several states waive or discount stamp duty for first-home buyers under certain price caps. Check your state’s revenue office to see what’s available where you’re buying.

The Takeaway

When a bank assesses you, it’s not about judging your lifestyle, it’s about measuring risk. They want to be sure you can handle the loan even if interest rates rise or your income dips.

The best thing you can do is understand your own numbers before you apply. Get clear on your spending, check your credit score, and use calculators to test different loan sizes.

And remember: just because the bank will lend you a certain amount doesn’t mean you should take it. Choose a loan that leaves room for the life you want to live, not just the house you want to own.

Buying your first home is a big deal, but with good planning, realistic expectations and the right support, it’s a goal that’s absolutely within reach.