Lenders assess income and employment to determine how much you can borrow and whether you can sustain repayments.
The calculation looks straightforward on paper, but the way different income types are treated varies significantly between lenders. A base salary is assessed at 100% of its value, while overtime, bonuses, and commission are often shaded or discounted. Casual and contract income attracts closer scrutiny, and self-employed applicants face an entirely different process that relies on tax returns rather than payslips. Understanding how your specific income structure will be interpreted gives you a clear view of your borrowing capacity before you apply.
How Lenders Assess Different Income Types
Lenders categorise income based on consistency and verifiability. Full-time PAYG employees with a stable base salary are assessed at the full declared amount, provided it can be verified through payslips and an employment letter. Overtime and bonuses are typically averaged over six to twelve months, then shaded by 20% to 50% depending on the lender's policy. Commission income attracts similar treatment, with some lenders requiring a two-year history before they include it in serviceability calculations.
Casual and contract workers are assessed differently again. Most lenders require at least six months of continuous employment with the same employer, and some ask for twelve. The income is averaged over that period, and gaps in employment can reduce the amount a lender is willing to include. Consider a casual retail worker in Mount Waverley who has been with the same employer for eight months. Their income fluctuates between $2,800 and $3,600 per month depending on rostered hours. A lender will average those figures and may apply a further discount to account for the variability, meaning their assessed income could sit closer to $2,500 per month even though their recent payslips show higher amounts.
Self-Employed Income and What Lenders Actually Count
Self-employed borrowers are assessed using tax returns, not bank statements. Lenders typically require two years of financials, and the income figure used is the net profit after deductions, add-backs, and adjustments. Depreciation, home office expenses, and one-off costs can sometimes be added back to increase assessed income, but this varies between lenders and depends on how those deductions are recorded.
In our experience, the most common issue is when a borrower has legitimately minimised taxable income for tax purposes but now needs to demonstrate a higher income to support a home loan application. A sole trader operating a consulting business from home might show $68,000 in net profit on their most recent tax return after claiming depreciation, vehicle expenses, and office costs. If the lender agrees to add back $12,000 in depreciation and $4,000 in non-recurring costs, the assessed income becomes $84,000. That difference can shift borrowing capacity by $80,000 to $100,000 depending on other liabilities and the loan structure.
Documentation requirements are more detailed for self-employed applicants. Two years of individual tax returns, notices of assessment, and business financial statements are standard. Some lenders also request an accountant's letter or business activity statements to verify trading continuity.
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How Employment Type Affects Loan Approval
Permanent employment carries more weight than probationary or contract roles. Most lenders will approve a loan for someone on probation, but they typically require confirmation from the employer that the probation period is progressing as expected and that ongoing employment is likely. A letter from the employer stating the end date of probation and confirming the role will continue beyond that point is usually sufficient.
Contract workers face more variability depending on whether the contract is ongoing or fixed-term. An ongoing contractor with a two-year history in the same industry and evidence of renewed contracts will generally be treated similarly to a permanent employee. A fixed-term contractor with three months remaining on their contract and no evidence of extension or renewal will find fewer lenders willing to proceed.
In a scenario where a Mount Waverley-based IT professional has been contracting for 18 months with the same client on rolling six-month contracts, most lenders would accept that income provided payslips, a current contract, and evidence of previous renewals are supplied. If the contract is genuinely short-term or project-based with no history of renewal, the application becomes harder to place.
Changing Jobs During the Application Process
Changing employment after submitting a home loan pre-approval application can delay or derail the approval. Lenders assess serviceability based on the income and employment details provided at the time of application, and any material change requires reassessment. If you move from one permanent role to another in the same industry at a comparable salary, most lenders will accept updated payslips and a new employment contract without significant delay. If the move involves a change in employment type, a pay reduction, or a probation period, the application may need to be resubmitted.
We regularly see this with buyers who receive a job offer after their pre-approval has been issued. The safest approach is to notify the lender immediately and provide updated documentation. Some lenders will proceed if the new role is confirmed in writing and the income is equal to or higher than the previous position. Others will treat the application as new, particularly if probation applies.
Income Documentation Requirements for Mount Waverley Buyers
For PAYG employees, lenders require recent payslips covering the most recent month or pay cycle, an employment contract or letter confirming position and salary, and often two years of tax returns and notices of assessment if the income includes variable components. Self-employed applicants provide two years of individual and business tax returns, notices of assessment, and financial statements prepared by an accountant.
Mount Waverley's median property values mean many applicants are borrowing significant amounts relative to their income, which increases the importance of accurate documentation. A missing payslip or an unsigned employment letter can delay settlement by days or weeks if the lender's credit team requires resubmission. Preparing the full document set before applying avoids those delays.
Anyone with multiple income sources, such as a primary employer and a secondary contracting role, should provide documentation for both. Lenders will assess each income stream separately and apply the relevant shading or discount. Rental income from an investment property is typically assessed at 80% of the declared amount to account for vacancy and maintenance costs.
What Happens If Your Income Is Difficult to Verify
Some lenders offer low-doc or alternative documentation loans for borrowers who cannot provide standard income verification. These loans typically require a larger deposit, attract a higher interest rate, and involve more restrictive terms. They are not a first choice, but they provide an option for self-employed borrowers in the early stages of a business, contractors with inconsistent income, or those with complex income structures that do not fit standard assessment criteria.
Another option is to wait until your income history meets standard lending criteria. If you have been self-employed for 14 months, waiting another 10 months to reach the two-year mark can open access to a wider range of lenders, lower rates, and more flexible loan features. The timing decision depends on market conditions, the urgency of your purchase, and whether waiting improves your overall position.
If your income structure is outside the standard assessment model, speaking with a broker who understands which lenders have flexible policies can make the difference between approval and decline. Some lenders accept one year of self-employed income if the borrower has prior industry experience as a PAYG employee. Others allow income from secondary employment to be included at 100% if it has been consistent for two years or more.
Understanding Borrowing Capacity and Serviceability Buffers
Borrowing capacity is not just a function of income. Lenders apply a serviceability buffer, which means they assess your ability to repay the loan at a higher interest rate than the actual rate you will pay. The buffer is typically 3%, so if you are applying for a loan with a variable rate around 6%, the lender assesses your capacity as though the rate is 9%. This buffer protects both you and the lender against future rate rises, but it also reduces the amount you can borrow.
Existing debts also reduce capacity. Credit card limits are assessed as though they are fully drawn, even if the balance is zero. A $10,000 credit card limit can reduce borrowing capacity by $40,000 to $50,000 depending on the lender's calculation. Closing unused cards or reducing limits before applying increases the loan amount you can access.
For buyers in areas like Mount Waverley where property values are higher, maximising borrowing capacity often involves a combination of demonstrating the highest possible assessable income, minimising liabilities, and choosing a lender whose serviceability model aligns with your income structure. A borrower with $120,000 in base salary and $20,000 in annual bonuses might be assessed at $130,000 by one lender and $125,000 by another, depending on how the bonus is shaded. That $5,000 difference translates to around $25,000 in borrowing capacity.
Understanding how lenders assess your specific situation allows you to prepare the right documentation, address potential issues before they arise, and choose the loan structure that gives you the strongest position. Call one of our team or book an appointment at a time that works for you to discuss how your income and employment will be assessed and which lenders are most likely to support your application.
Frequently Asked Questions
How do lenders assess self-employed income for a home loan?
Lenders use two years of tax returns and assess net profit after deductions. Some deductions like depreciation can be added back to increase assessed income, but this depends on the lender and how the deductions are recorded.
Can I get a home loan if I am on probation?
Most lenders will approve a loan during probation if the employer confirms the role is progressing as expected and ongoing employment is likely. A letter from your employer is usually required.
What happens if I change jobs after getting pre-approval?
Changing jobs can delay or require reassessment of your application. If the new role is permanent, in the same industry, and at a similar salary, most lenders will accept updated documentation without major issues.
How much of my overtime or bonus income will lenders count?
Overtime and bonuses are typically averaged over six to twelve months and then shaded by 20% to 50%. The exact treatment depends on the lender's policy and how consistent the income has been.
Do unused credit cards affect how much I can borrow?
Yes, credit card limits are assessed as though fully drawn even if the balance is zero. A $10,000 limit can reduce borrowing capacity by $40,000 to $50,000, so closing unused cards before applying can help.
