Borrowing capacity - your income
To get your loan approved a lender needs to see you have sufficient disposable income to meet the loan repayments.
Lenders have different attitudes towards certain types of income but there are many areas where they tend to be relatively consistent. This is particularly the case where a loan requires mortgage insurance. As many lenders will use the same mortgage insurer and therefore be subject to the same credit policy.
The first thing you should be aware of is that the amount you can qualify for can vary significantly from lender to lender. Even between the major banks there can be significant variations. For example across a panel of over 30 lenders, a couple earning $80,000 per annum could potentially borrow anywhere between $415,000 to $514,000, based on the same information. This is because each lender has differing credit policies and formulas they use to determine your credit worthiness.
So if you are only considering one or two lenders then you could be cutting yourself off from plenty of options.
Full time and permanent part time
Lenders are looking for stability in employment. Generally at least 6 months in one job, and at least two years or more in the same industry. No probation. If you don’t have 2 years in the same industry then they will be looking for at least 12 months in your current position.
If you have a history of changing jobs or professional on a regular basis then this could go against you.
Generally at least 12 months employment or 2 years in the same industry. Lenders may want to see 12 months worth of income to establish an average earning
Self-employed or contract worker
In almost all cases lenders will require you to be trading for a minimum of 2 years. For most businesses lenders will also require a registered ABN for 2 years. If an ABN can not be produced some lenders will accept a letter from your accountant confirming the business has been trading for 2 years.
Working in a family business
Most lenders will treat this the same as being self-employed and therefore will want to see a 2 years trading history for the business.
In terms of income lenders are trying to establish regular and reliable sources of income. So if you are an employee, have been in your job for some time, and are paid the same amount week in week out then 100% of your based gross income will be considered.
The areas where it becomes greyer are as follows:
If overtime is standard for your industry (such as nursing) then most lenders will allow 100% to be included for servicing. It may however be necessary to provide additional documentation such as group certificates or a letter from your employer to confirm that overtime is a standard requirement of your job.
If it is not industry standard then two years tax returns or group certificates plus a letter from your employer may be required.
Most lenders will generally want to see 2 years history of earnings if bonuses and commissions are part of your remuneration. If you have been employed for 12 months and commission is a condition of your employment then some lender may consider 100% if this can be documented.
If you have been in your position for less than 12 months this it is likely only your base salary will be considered.
This varies quite considerably amongst lenders ranging from not at all to 100%. If the allowance can be cashed in then several lenders will allow 100% to be used. If not several lenders will at least allow it to be offset against any lease payments. So for example if your allowance was $10,000 and your vehicle lease payments were $8,000 per annum. Then the lease payments would not be included as part of your assessment. The remaining $2,000 however would not be added to your income.
Some will lenders will only allow 50% to be used or will simply have a dollar cap that is applied.
Self-employed and contract
To establish your income, business and personal tax returns and financial statements will be required. Income/profit will generally be averaged over two years. Most lenders will allow add-backs for non-cash items like depreciation and non-recurring expenses.
Rental income from investment property
Lenders will generally use between 70-80% of the gross rental amount. Income must generally be confirmed from either a current lease agreement or rental statements. For newly acquired properties a letter from a real estate agent confirming the expected rental can often be used.
Rent received from boarders
Generally this type of income will not be accepted. Some lenders may consider it if tax returns can demonstrate that it has been earned consistently over a 2 year period.
Dividends from investments or share trading
Needs to be evidenced from 2 years tax returns
Generally not accepted but will be considered by some lenders where there is a court order in place, the children are less than 10 years, and consistent payment over 12 months can be demonstrated.
100% of the Family Tax Benefit will be considered in most cases where the children are less than 11 years of age. 100% of government pensions will be considered if they are ongoing and are evidence by relevant documentation. Unemployment benefits and New Start are generally not considered.
You can see from above what you actually earn and what can be included for assessment can end up being quite different. The above of course is only general and what can and can’t be used will vary from lender to lender. Also as mentioned above some lenders serviceability calculators are more favourable than others.
Contact us to discuss your home loan requirements or a for a review of your current lending.