The Two Pillars of Home Loan Approval: What Lenders Really Look For

When you apply for a home loan, many borrowers assume it's all about their credit score or employment history. While these factors matter, lenders primarily focus on two fundamental questions: Do you have enough skin in the game? And can you afford the repayments?

Understanding these two pillars of loan approval can help you better prepare for your home purchase and avoid disappointment during the application process.

Pillar One: Equity or Cash Contribution

Lenders don't want to provide 100% of the funds needed to buy a property, and the reason is straightforward: if you default on the loan, they need to sell the property to recover their money. This process involves real estate fees, legal costs, and potential market fluctuations that could reduce the property's value. Your deposit provides a buffer that protects the lender against these risks.

Cash Deposits

For most first-time buyers, this means saving a deposit from your own funds. While you can purchase with as little as 5% deposit under certain schemes, you'll typically need at least 20% to avoid Lenders Mortgage Insurance (LMI). This insurance protects the lender if you default, but you pay the premium - often thousands of dollars.

Using Equity from Existing Property

If you already own property, you can use the equity as your contribution instead of cash. However, this works differently than many borrowers expect.

Lenders will typically allow you to borrow up to 80% of your existing property's value (to avoid LMI). From this 80% threshold, you subtract any existing debt on that property, and the remainder is your available equity.

For example, if your home is worth $800,000 and you owe $400,000, your calculation looks like this:

●      80% of $800,000 = $640,000

●      Minus existing debt = $640,000 - $400,000 = $240,000 available equity

The Common Misconception

Many borrowers believe that having substantial equity automatically guarantees loan approval. "I have $200,000 in equity, so the bank should approve my loan easily," is a statement we hear regularly. Unfortunately, having equity is only half the equation. You still need to prove you can afford the repayments, which brings us to the second crucial pillar.

Pillar Two: Cashflow or Repayment Capacity

Having enough deposit or equity means nothing if you can't demonstrate the ability to repay the loan over its term. Lenders need to see consistent, ongoing income that will continue throughout the loan period.

What Lenders Accept as Income

Employment Income: Regular wages shown through payslips are the gold standard for most lenders. Self-employed income is assessed through tax returns and financial statements, typically requiring at least two years of trading history.

Government Benefits: Regular government payments such as Family Tax Benefits, Disability Support Pension, or Age Pension can contribute to your serviceability.

Superannuation: For retirees, regular superannuation drawdowns can demonstrate repayment capacity.

What Doesn't Count

One-off payments, regardless of size, won't help your loan application. These include:

●      Capital gains from property or share sales

●      Inheritance payments

●      Redundancy payouts

●      Lottery winnings or other windfall payments

While these funds can certainly contribute to your deposit, they can't be used to demonstrate ongoing repayment capacity because they won't continue into the future.

The Serviceability Test

Lenders don't just look at whether you can afford repayments at current interest rates. They stress-test your capacity by calculating repayments at rates typically 2-3% higher than current rates. This buffer ensures you could still afford the loan if rates increase significantly.

Beyond the Two Pillars

While equity and repayment capacity are the primary factors in loan approval, lenders also consider:

●      Credit history and existing loan conduct

●      Employment stability

●      Existing debts and financial commitments

●      The property you're purchasing

However, these factors are secondary to the fundamental questions of contribution and capacity.

Getting It Right

Understanding these two pillars helps you prepare properly for your home loan application. Before you start looking at properties, ensure you have:

1. Sufficient deposit or equity available

2. Documented, ongoing income to support repayments

3. A clear understanding of your borrowing capacity

   
   

At Astute East Brisbane, we help clients understand their position across both pillars before they apply. This preparation increases approval chances and helps you set realistic property search parameters.

Ready to understand your borrowing position? Contact our team on (07) 3667 8988 for a comprehensive assessment of your equity and repayment capacity.

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This information is general in nature. Individual lending criteria vary between institutions. We recommend speaking with a qualified mortgage broker to understand your specific circumstances.

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Disclaimer:

Astute Financial Management Pty Ltd | ACN 093 587 010 | Australian Credit Licence 364253 | Davgan Insurance & Wealth Pty. Ltd. T/As Astute East Brisbane Corporate Authorised Representative (425641) of Alliance Wealth Pty Ltd | ABN 93 161 647 007 | AFSL 449221. www.centrepointalliance.com.au/aw | General Insurance provided by Astute Insurance Pty Ltd | ABN 59 622 582 236 | Authorised Representative of Ausure Pty Ltd ABN 94 096 971 854 AFSL 238433. Health Insurance products are underwritten by St Luke’s Medical and Hospital Benefits Association ACN 009 479 618 (St.LukesHealth), a registered private health insurer, [trading as Astute Simplicity Health] and members are introduced by Astute Financial Management Pty Ltd or related entities (collectively known as Astute) for which Astute receives a commission.

General Advice Warning: 

This communication contains general information only and in no way constitutes the provision of professional advice, nor should it be relied on as a substitute for financial, credit, accounting, legal or other professional advice. We have not taken into account your financial situation, investment objectives or particular needs. Before making an investment or financial decision, a person must seek appropriate independent professional advice and also consider whether this information is appropriate to their needs, objectives and circumstances. The author as well as their representatives, agents and employees give no guarantees and make no representations, express or implied, as to the accuracy, currency, completeness or suitability of the information contained in this document. Nor do they accept any liability whatsoever as a result of any information herein being incorrect, incomplete or unsuitable or as a result of a person in any way using or relying on the information herein.