8 Reasons Why You’re Not Getting Approved for a Home Loan (And How to Fix It)

Applying for a home loan and getting rejected can feel like a huge setback. But understanding the reasons behind why you’re not getting approved can be the first step to getting back on track. In this post, we’ll walk you through the 8 most common reasons why Australian buyers are having their home loan application declined and give you practical tips on how to improve your chances of success.

From rising interest rates, affordability, stricter lending criteria, or higher deposit requirements, we’ll cover the key factors affecting your mortgage application. Plus, we’ll show you what you can do to address these issues and increase your approval chances. Whether you’re a first-time buyer or refinancing, this guide is packed with actionable advice.

👉 Apply Now to get expert mortgage broker help and find the right home loan solution for you!

Common Challenges for borrowers

Homebuyers and borrowers in Australia are facing a range of challenges when it comes to securing and managing home loans, especially in the context of evolving economic conditions, interest rate changes, and the competitive property market. Below are some of the most common challenges that homebuyers and borrowers are experiencing in Australia:

1. Cost of Living Challenges: Why It’s Hurting Your Loan Approval

One of the biggest reasons why many buyers aren’t getting approved for a home loan in 2025 is the rising cost of living. Increased expenses for everyday items like food, utilities, and fuel are stretching household budgets, leaving little room for saving or paying down debt. This can affect your borrowing capacity and ability to meet the lender’s requirements.

If your spending habits are being impacted by inflation or rising costs, it could signal to lenders that you’re less able to manage mortgage repayments comfortably.

The rising cost of living is one of the most significant challenges facing Australians right now. With everyday expenses such as groceries, utilities, petrol, and childcare eating up more of the household budget, many borrowers find it harder to save for a deposit or maintain healthy financial habits. 

The Solution: Smart Budgeting and Financial Management

While the cost of living may be out of your control, there are steps you can take to show lenders that you can still manage your finances responsibly:

1. Track and Adjust Your Spending: Start by reviewing your spending habits. Are there areas where you can cut back? Small changes, like cooking at home more often, reducing discretionary spending, or switching to more affordable utilities, can make a big difference in your budget. Free budgeting apps can help you track your expenses and identify areas for improvement.
2. Build Up Your Savings: Lenders love to see that you can save consistently, so try to set aside a portion of your income each month—no matter how small. Even modest savings can demonstrate financial discipline. Consider putting your savings into a high-interest account to grow your deposit over time.
3. Pay Down Existing Debts: If you have outstanding debts (like credit cards or personal loans), try to pay them down as much as possible before applying for a home loan. Reducing debt not only boosts your borrowing capacity but also improves your debt-to-income ratio, which is a key factor for lenders.
4. Consider a Co-Applicant: If you’re finding it challenging to meet the requirements on your own, consider applying with a co-applicant (such as a partner or family member). This can improve your chances of approval by combining both incomes and strengthening your overall financial position. You could also seek to use a Guarantor (to use their property as security for your loan) which may open up a whole lot more possibilities to getting you approved. 
5. Refine Your Loan Application: If the cost of living is limiting your ability to show financial strength, working with a mortgage broker can help you present your application more effectively. A broker can help you highlight your strengths (like consistent saving or a low debt-to-income ratio) and guide you toward lenders who may be more flexible.
6. Emergency Fund: Try to establish an emergency fund to cover unexpected costs. Having financial reserves shows lenders that you can handle fluctuations in your financial situation and still maintain mortgage repayments.

2. Stricter Lending Criteria

In the wake of the Royal Commission into banking, lenders have become more cautious and stricter in their lending practices. While this is aimed at ensuring responsible lending, it has made it more challenging for some buyers, particularly:

• First-time homebuyers: Those with smaller deposits or irregular income streams may find it difficult to meet the stricter requirements.
• Self-employed borrowers: Lenders often scrutinise self-employed applicants more closely, and proving income can be more challenging for this group.Again, this is where working with an mortgage broker experienced with self-employed applicants can be invaluable to your pathway to loan approval. 
• Debt-to-Income Ratios: Banks are more focused on a borrower’s debt-to-income ratio, meaning that those with existing debts may find it harder to secure a mortgage.

Solution: Lenders will typically require a higher deposit (often 20% or more) or evidence of strong financial habits (savings, low credit card debt, etc.). Mortgage brokers can help navigate this process and find lenders more flexible with their criteria.

3. Rising Property Prices

While home prices in some regions have leveled off, in many parts of Australia, property prices have risen sharply in others, especially in competitive suburbs. This can create a pricing dilemma for buyers:

• Increased deposit requirements: Higher property prices mean homebuyers need larger deposits to avoid paying Lenders Mortgage Insurance (LMI).
• First-time buyers’ struggle: First-time homebuyers, in particular, find it difficult to enter the market as they struggle to raise a significant deposit, especially with soaring home values.

Solution: Homebuyers should consider options like government grants (such as the First Home Owner Grant or First Home Loan Deposit Scheme) to help lower upfront costs. Additionally, opting for areas that are slightly further from city centres can offer more affordable options.

4. Deposit Challenges

The size of the deposit required to secure a mortgage is a persistent barrier for many Australians. The ideal deposit is typically 20%, but given the high cost of property, many buyers are struggling to save this amount.

• Lenders Mortgage Insurance (LMI): Buyers with less than a 20% deposit are often required to pay LMI, which adds thousands of dollars to the overall cost of the loan.
• Delays in saving: Given the rising costs of living and other financial pressures, many buyers are finding it increasingly difficult to save a substantial deposit.

Solution: First-time buyers can look into schemes like the First Home Deposit Scheme or consider lower deposit home loan options (like a 10% deposit). It’s also important to have a good savings strategy or consider alternative sources like parental guarantees.

5. Low Housing Supply

Australia is currently experiencing a housing shortage in several key cities and regions, which has contributed to rising home prices. The limited supply of homes means buyers are facing stiff competition in popular areas. This can lead to:

• Higher competition: Homebuyers often find themselves bidding in competitive auctions or dealing with multiple offers on the same property.
• Longer wait times: Even if buyers are pre-approved for a loan, finding the right property can take time, leading to potential delays in purchasing.

Solution: Buyers should be patient and flexible with their property search. Also, working with an experienced real estate agent and mortgage broker can help buyers find suitable properties faster and make competitive offers.

6. Limited Access to Information and Advice

Despite the wealth of online information, many homebuyers still feel overwhelmed by the complexity of the loan process, particularly:

• Confusing loan options: There are a wide variety of loan products available, each with different features, which can be confusing for first-time buyers.
• Lack of financial literacy: Some buyers struggle to fully understand the implications of taking on a mortgage, particularly around repayment terms, interest rates, and fees.
• Navigating government schemes: First-time buyers in particular may not fully understand the various government programs available to assist them.

Solution: Working with a mortgage broker can simplify the process. Brokers provide expert advice, explain loan options in simple terms, and help navigate the complex home loan landscape. They can also assist with finding government grants and schemes that can lower costs.

7. Underestimating Additional Costs

Homebuyers often underestimate the additional costs involved in purchasing a home beyond the deposit, which can create financial strain:

• Stamp duty: This can be a significant cost, especially in high-value markets. It can not be added to the purchase price. It is a cost you will need to save for a long with your deposit. You can read all about how stamp duty works here. 
• Legal and conveyancing fees: These are mandatory and can add up quickly.
• Home inspections: Buyers are advised to conduct property inspections, which come with their own costs.

Solution: Buyers should factor in all these additional costs early in the home buying process. A rough estimate is that homebuyers should set aside at least 5-10% of the property price for these extra expenses. 

8. Loan Pre-Approval Issues

Many buyers rely on pre-approval to know how much they can borrow, but this can often be a source of stress:

• Pre-approval expiry: Pre-approvals typically last for 3 to 6 months, and many buyers don’t realise this until the pre-approval expires.
• Changes in financial situation: If a buyer’s financial circumstances change during the approval process (such as job loss, pregnancy or a change in income), it could jeopardise the mortgage application.

Solution: Buyers should be aware of their pre-approval expiry date and ensure their financial situation remains stable. It’s also helpful to get pre-approval as early as possible in the home-buying process, so there’s enough time to act before it expires. It’s important to know that pre-approvals don’t come with a guarantee if your circumstances change. You will still need to go through the usual application process. 

The Australian home loan landscape in 2025 presents a complex mix of challenges for buyers. From rising interest rates to stricter lending criteria and high property prices, the road to homeownership requires careful planning and expert advice. However, with the right strategy and professional guidance from a mortgage broker, homebuyers can navigate these challenges and secure the best possible outcome.

If you’re struggling with any of these challenges or need help understanding your home loan options, Base Home Loans is here to assist. Our experienced team can guide you through the complexities and find the right home loan solution for your needs.

👉 Apply Now to get expert help with your mortgage today!

Please also feel free to book a time in our calendar for a 15 minute chat about your situation and how we can help to get you approved!

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.