Common Mistakes in Home Loan Serviceability Assessments

What Lenders Actually Test When You Apply

Lenders assess your ability to repay a loan at an interest rate 3.0 percentage points above the product rate, not at the rate you'll actually pay. APRA requires all ADIs to assess new borrowers' capacity to service a home loan at an interest rate that is at least 3.0 percentage points above the loan product rate. If you're applying for a variable rate currently sitting around 6.2%, the lender tests your repayments as though the rate were 9.2%. A couple applying for a $600,000 loan might see actual repayments of roughly $3,850 per month, but the lender will assess whether they can service a repayment closer to $4,850 per month.

This buffer protects both you and the lender against future rate rises. It also means that applicants who calculate affordability based on current advertised rates often overestimate what they can borrow by $100,000 or more. The buffer applies to all new home loan applications, regardless of whether you choose a variable, fixed or split rate structure.

Income That Doesn't Count the Way You Think It Does

Salaried income from permanent employment is assessed at 100% of the contracted amount. Income from other sources is treated differently. Rental income from an investment property is typically assessed at 75% to 80% of the actual rent received, to account for vacancy periods and maintenance costs. Overtime and bonuses are often shaded to 50% or 80% depending on consistency and the lender's policy. Commission income may require two years of tax returns showing stable or increasing earnings before a lender will include it at a weighted percentage.

Consider a buyer in South Perth who works in sales with a base salary of $85,000 and variable commissions that averaged $40,000 over the past two years. The lender might assess total income at $85,000 plus 80% of $40,000, giving an assessed income of $117,000 rather than the actual $125,000 earned. That $8,000 reduction can reduce borrowing capacity by $40,000 to $50,000 depending on other committed expenses.

Self-employed applicants are generally assessed on the net profit shown in their tax returns, not on turnover or drawings. If you've claimed significant deductions to reduce taxable income, those deductions also reduce your assessed borrowing capacity. A sole trader showing $70,000 net profit after depreciation and vehicle expenses will be assessed on that $70,000 figure, even if cash flow is higher.

How Existing Debts Are Weighted

Lenders include all current debt commitments in their serviceability calculations, even if those debts are close to being paid off. A car loan with $3,000 remaining is assessed as though the full monthly repayment will continue for the life of the home loan. Credit card limits are treated as though they're fully drawn, regardless of the actual balance. A card with a $15,000 limit and a zero balance is calculated as though you're making minimum repayments on $15,000 of debt, which typically equates to roughly $450 per month in the serviceability test.

Buy now, pay later arrangements are treated inconsistently across lenders. Some assess them as ongoing commitments if they appear on your credit file or bank statements with regular activity. Others apply a flat monthly cost per active account. Applicants with multiple services and combined limits above $5,000 can see a measurable reduction in borrowing capacity. Closing unused accounts and reducing credit card limits before applying can improve your assessed position by tens of thousands of dollars.

For those considering refinancing, the commitment you're seeking to replace is generally excluded from the calculation, but any additional top-up amount or new debt must be serviced within your current income and expense position.

Living Expenses and the HEM Benchmark

Lenders assess your living expenses using either your actual declared expenses or a benchmark figure called the Household Expenditure Measure, whichever is higher. The HEM is calculated based on household size, income level and location. A single applicant in Perth earning $90,000 might have a HEM figure of around $2,200 per month, while a couple with one dependent and a combined income of $150,000 could have a HEM closer to $3,800 per month.

If your actual expenses are lower than the HEM, the lender will still use the HEM. If your actual expenses are higher, the lender uses the higher figure. This means that underestimating or omitting regular costs doesn't improve your application. Three months of bank statements showing childcare costs, private school fees, regular medical expenses and subscription services will be counted in full. Applicants who maintain tight control over discretionary spending and can demonstrate genuine monthly expenses below the HEM gain no advantage in the assessment, because the benchmark applies regardless.

Lenders also add a margin to your assessed expenses to allow for unexpected costs. The combination of the HEM floor, the 3.0 percentage point buffer, and existing debt commitments means that serviceability can become the binding constraint on borrowing capacity well before deposit size or loan to value ratio becomes an issue.

Debt-to-Income Limits That Apply from February 2026

APRA activated a DTI lending limit on 27 November 2025, effective from 1 February 2026, applying to all ADIs. Each ADI may lend, measured on a quarterly basis, up to 20 per cent of new owner-occupier loans and up to 20 per cent of new investor loans to borrowers with a total DTI ratio of six times or greater. If your total borrowing is six times your gross annual income or more, the lender may still approve the loan if it falls within their quarterly allocation, but approval becomes less certain and may depend on timing and portfolio position.

For a household earning $120,000 per year, the six times threshold sits at $720,000. Borrowing above that level doesn't make the loan automatically unapprovable, but it moves the application into a restricted pool. Applicants seeking investment loans face the same 20% cap, applied separately to the lender's investor lending book. The limit applies only to new lending and does not affect existing borrowers or those refinancing without increasing their loan amount.

When Serviceability Improves After Pre-Approval

Pre-approval is assessed using the same serviceability criteria as a full approval, but it relies on the information you provide at the time of application. If your income increases, your debts reduce, or your expenses fall between pre-approval and formal application, your borrowing capacity can increase. A pay rise of $10,000 per year can lift capacity by $50,000 or more depending on your existing commitments. Paying out a car loan or closing a credit card can have a similar effect.

The reverse also applies. Taking on new debt, increasing a credit card limit, or entering into a payment plan between pre-approval and settlement can reduce your assessed capacity and put settlement at risk. First home buyers who receive pre-approval and then finance a car or furniture before settlement occasionally find themselves unable to meet the conditions of their loan approval.

Serviceability is recalculated at the time of formal approval and again before settlement if there's any delay or change in circumstances. Lenders require updated payslips and bank statements at each stage, and any material change in income, employment or financial commitments will trigger a reassessment.

Why Two Applicants Don't Always Double Your Capacity

Adding a second applicant increases household income but also increases assessed living expenses under the HEM. A single applicant might have a HEM of $2,200 per month, but a couple's HEM could be $3,200 rather than $4,400, reflecting shared housing and transport costs. The net benefit depends on the second applicant's income relative to any additional debts or commitments they bring into the application.

If the second applicant has a stable full-time income and minimal debt, the increase in capacity can be substantial. If the second applicant has casual or part-time income, existing debts, or dependents from a previous relationship, the additional capacity can be marginal. In some cases, adding a second applicant with poor credit history or high existing commitments can reduce the amount the primary applicant could have borrowed alone, or limit the pool of lenders willing to assess the application.

Joint applications for couples buying in South Perth or other high-value areas often assume that two incomes will support a proportionally higher loan, but the serviceability test applies to the combined financial position, including combined debts, combined expenses, and the higher of actual or benchmark living costs for a multi-person household.

What Actually Helps Before You Apply

Reducing credit card limits to the lowest level you'll realistically use makes a measurable difference. Closing accounts you no longer need removes them from the calculation entirely. Paying out small debts before applying removes the assessed monthly commitment, even if the debt would have been cleared within weeks. Consolidating multiple buy now, pay later accounts into a single manageable facility, or closing them entirely, reduces both the assessed cost and the complexity of the application.

Applicants who are self-employed should consider the structure of their tax returns in the year or two before applying. Maximising deductions reduces taxable income but also reduces assessed borrowing capacity. Timing a loan application for the year after a strong profit result, rather than the year after a loss or reinvestment, can make the difference between approval and decline.

For those considering a construction loan or house and land package, lenders assess serviceability on the total loan amount required, not just the initial progress payment. The full debt commitment is tested from the outset, even though repayments during construction may be interest-only and lower than the final principal and interest repayment.

Understanding how lenders assess your application means you can structure your finances to reflect your genuine capacity rather than allowing incidental debts or unused credit to reduce your position. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions