11 Less Obvious Factors That Can Affect Your Home Loan Borrowing Capacity

When applying for a home loan, most people are aware of the standard factors that impact borrowing capacity, like income, expenses, credit score, and the size of the deposit. However, there are some more obscure or less obvious factors that can also influence how much a lender is willing to lend. Here are a few:

1. Frequency and Type of Employment Contracts

• Casual and Temporary Employment: If you’re employed on a casual or temporary basis, lenders may view your income as less stable. In such cases, you might need a longer history of employment or a higher premium on your income for it to count towards your home loan borrowing capacity.
• Contract Workers or Self-Employed: Those on short-term contracts or self-employed may face more scrutiny. Lenders typically require a longer history (often 2+ years) of income to calculate home loan borrowing capacity.

2. Rental Income and Investment Properties

• Vacancy Periods: If you’re renting out a property, lenders will usually consider 75%-80% of the rental income in your borrowing capacity. However, if the property has frequent vacancy periods or a history of low rents, the lender may discount the rental income more heavily or disregard it altogether.
• Negative Gearing: Some lenders are cautious about borrowers who heavily rely on negative gearing (where rental income is less than the mortgage interest). While this can reduce taxable income and increase tax refunds, it might also limit the lender’s assessment of your actual disposable income.

3. Gifts and Loans from Family/Friends

• Unverifiable Sources: If you’re receiving large gifts or loans from family or friends for your deposit, some lenders may require proof that the money doesn’t need to be repaid (i.e. a genuine gift and not a loan). If it’s a loan, it could impact your debt-to-income ratio.
• Lender’s Perception of Stability: If your deposit comes from a family member or friend with financial instability (e.g., a history of bankruptcy), it might raise concerns about the reliability of the source.

4. The Type of Debt You Have

• Debt Type: Some lenders are more sensitive to the nature of the debt you hold. For example, payday loans or buy-now-pay-later schemes (BNPL), even if small, can impact your home loan borrowing capacity. These are seen as high-risk debts and may raise red flags for lenders.
• Secured vs Unsecured Debt: Secured debts (e.g., car loans or personal loans secured by assets) may be treated differently than unsecured debts (credit cards, personal loans) in terms of your debt-to-income ratio.

5. Credit Score Anomalies

• Minor Late Payments or Defaults: Even a single late payment or a minor default (such as a phone bill) can significantly affect your credit score. Some lenders are stricter and may reduce your home loan borrowing capacity even if the event was small and several years ago.
• Too Many Recent Credit Inquiries: Having a high number of recent credit inquiries on your file can indicate that you might be financially stretched or actively seeking credit, which may limit your borrowing capacity.

6. Living Expenses Estimation

• Lifestyle Choices and Expenditures: Lenders often estimate living expenses using their own benchmarks, and these may be higher than your actual costs. If you live in an area with high living costs (e.g., expensive city or high-cost suburbs), the lender might assume a higher cost of living than you are experiencing, thus reducing your borrowing capacity.
• Discretionary Spending: If your spending habits (as assessed through bank statements or declared expenses) show a high level of discretionary spending (e.g., eating out, shopping, entertainment), it could lower your borrowing capacity, even if your overall income is high.

7. Spousal or Partner’s Financial Situation

• Debt or Credit Issues of a Co-Applicant: If you’re applying for a loan with a partner or spouse, the lender will often consider both of your financial situations. If your partner has significant debt, a poor credit score, or an unstable employment history, it could limit your home loan borrowing capacity.
• Separation Risk: Lenders are also cautious if one partner has a history of divorce or separation, as this could indicate potential future financial instability. If your household has been through multiple separations, some lenders may be cautious about predicting long-term income stability.

8. Property Zoning or Development Plans

• High-Risk Properties: Lenders may be cautious about properties that are in areas prone to natural disasters, or where zoning changes, development projects, or land use changes might occur. These factors can affect the resale value or the livability of the property, which may impact the loan-to-value ratio (LVR) or the loan approval process.
• Strata Properties and Fees: If you’re buying a unit or a property under a strata scheme, some lenders may be more conservative with their lending due to concerns over strata fees or issues with the strata corporation. This can also be more common in older buildings or properties in areas with a high concentration of investor-owned properties.

9. Unusual or Irregular Income Sources

• Commission or Bonus-based Income: If your income is heavily commission-based or includes significant bonuses, lenders often take a more conservative approach. Some lenders may only count the base salary when assessing borrowing capacity, whereas others may use a longer-term average of your commission or bonus earnings.
• Trust Income: If your income comes from a family trust or investment vehicle, it can be more difficult to verify your regular income, which could impact your borrowing capacity. Lenders might require more detailed documentation, and some might not accept trust income at all.

10. Foreign Currency and Offshore Income

• Currency Risk and Conversion Issues: If you have income coming from overseas or in a foreign currency, lenders may be cautious about the stability of that income due to currency fluctuations, tax regulations, and the difficulty of verifying the amount.
• Non-Resident Borrowers: Non-residents or borrowers with visas can face different lending criteria, such as needing a larger deposit (often 30% or more) and facing restrictions on the type of property they can purchase.

11. Unpaid or Overdue Taxes

• Tax Liabilities: Unpaid taxes, including outstanding debts to the ATO (Australian Taxation Office) or similar bodies, can limit your home loan borrowing capacity. Some lenders may consider this as part of your liabilities, even if it’s not technically classified as a “debt” in your personal finances.

By understanding these less obvious factors, you can better prepare when applying for a home loan, whether it’s making sure your living expenses align with a home loan lender’s expectations, or being cautious about debts that could be overlooked but still affect your home loan borrowing ability. If you’re unsure about any of these factors, it can be helpful to consult a mortgage broker who can help you navigate the finer details of the lending process.

Get expert advice about your borrowing capacity tailored to your needs from a trusted Perth mortgage broker, contact us today to book a discovery call, or read more here about the benefits of using a mortgage broker and why people choose us instead of going straight to the bank.

Disclaimer: The information provided on this blog is for general informational purposes only and does not constitute financial or professional advice. While we strive to provide accurate and up-to-date information, mortgage laws and regulations can change, and individual circumstances may vary. We recommend consulting with a qualified financial advisor or mortgage broker to assess your specific situation and needs. Base Home Loans is not responsible for any actions taken based on the content of this blog. Always conduct your own research and consider seeking professional advice before making financial decisions.