How is your income assessed by lenders?
When looking to purchase a property, it’s easy to get caught up in looking for the right property and leaving the ‘how you’re going to pay for it’ part for later. But to make the home buying process easier, it’s always good to have confidence in how much you can borrow.
Many people believe that their income is sufficient to cover their debt repayments so they shouldn’t have any issues securing a loan but in reality, that all depends on a few key factors.
Here is a range of factors that might impact your borrowing capacity:
Your income
The biggest driver of your borrowing capacity will be how much you earn. All things being equal, the larger your income, the greater amount that you can borrow. This can include earnings as an employee, or as business owner. It can also include rental income and earnings from other investments.
How you earn your income
There are differences in how lenders asses income as a paid employee (referred to as Pay As You Go or PAYG, which means you are paying tax as you earn your money), or as a self-employed business owners and the evidence that is required. As a PAYG income earner, you will need to supply payslips or bank statements to demonstrate your income for at least 2 months from an employer.
If you are a business owner, you will need up to 2 years in operation and a registered business, you will also need to supply 2 years personal and business tax returns and Notice of Assessments. Furthermore, different lenders may calculate the income using averages over the 2 years.
Other types of income will include bonuses, overtime, allowances and commission. Each of these are assessed differently by lenders, however it is important to include this information in any borrowing capacity calculations. It is important to note that all lenders will only asses you based on historical income, so they will not take into account pay-rises that could occur (even if you have approval in writing from your employer), or extra business or sales you will make in the future.
Rental income can be included in your income, but bear in mind that lenders will discount that amount by 20% to allow for expenses and time the rental may be vacant.
Other types of income that can be included are some types of Centrelink, NDIS income and income from investments. This will depend on the type and frequency of the payments.
How much you work and your type of employment
Lenders prefer full-time PAYG employees. They represent the lowest risk and the greatest stability. But that doesn’t mean that casual and part-time workers cannot secure a home loan as long as long as they earn enough money to make the repayments.
There are a different set of rules for this income. Often lenders will need at least 6-12 months of employment with the same employer to count casual and part-time work. And they may only count 80% of what you earn given the number of hours may not be predictable.
This may also be the case with any overtime hours or hours with loading (such as public holidays).
There are exceptions available with essential services workers, such as health care and emergency services. In most instances, overtime and allowances may be included at 100%.
Second jobs are also acceptable to lenders and can be included in your income. Depending on the type of work, lenders may accept 100% of the second job (excluding the caveats mentioned above).
However, lenders will look at the total hours per week that you are working. A home loan typically lasts for 30 years.
It would not be realistic to work a full-time 38 hour/week job and then go to a part-time second job for 30 hour/week for 30 years.
A lender may only assess you based on 60 hours per week, or discount the 2nd income by 20% as they don’t view it as sustainable - you would probably have a nervous breakdown if you worked that much.
However, you may have two permeant part-time jobs (like a lot of health-care workers), or work full-time in a role, but have a self-employed side-hustle selling home-made craft online, for example. As long as you declare that 2nd self-employed income to the ATO, then it is acceptable to a lender, provided it fits all the previous self-employed criteria and you can verify the income.
The easiest way to understand your borrowing capacity is to contact me.
I work closely with my clients each step of the lending processes to ensure you are clear on what you can borrow, how much deposit you will need and what additional factors you need to consider. We also help our clients obtain pre-approval so that they can make offers on houses or bid at auctions with more confidence in their borrowing capacity.
To take the stress out of the process and determine your borrowing capacity, get in touch.
If you want to get started, you can complete our 5 minute form here: https://bit.ly/43VqyrH
Call on: 0418 552 938
Email at: peter.jefferson@mortgagechoice.com.au, or
Book a time to chat: https://bit.ly/43WsXma
If you’re a first home buyer, I’ve also created a useful guide to help you understand other key aspects of buying your first home.