Question 1

How is borrowing capacity actually calculated by lenders?

Accepted Answer

Lenders use a serviceability calculator that takes your gross income, deducts tax, deducts a Household Expenditure Measure (HEM) or your declared living expenses (whichever is higher), deducts existing loan repayments at an assessment rate (your actual rate plus the APRA serviceability buffer), and any other commitments. The remainder is your monthly surplus, which the lender capitalises into a maximum loan amount. Different lenders use different HEM benchmarks, treat rental income differently (usually 70–80% counted), and apply policies inconsistently — which is why two lenders can offer materially different amounts on the same scenario.

Question 2

What is the APRA serviceability buffer and how does it affect me?

Accepted Answer

APRA requires lenders to assess loan repayments at your actual rate plus a 3% buffer (as at the latest setting). So if rates are 6.5%, the lender stress-tests at 9.5%. This significantly limits borrowing capacity — typically a $100k income borrower can only access about 70–80% of what they could without the buffer. The buffer is reviewed periodically by APRA based on financial stability concerns.

Question 3

Can I use future rental income to qualify for a bigger loan?

Accepted Answer

Yes — most lenders count 70–80% of expected rental income (the discount allows for vacancy, management fees and repairs). Some lenders use a real estate appraisal letter to set the figure, others use a desktop valuation. A few specialist lenders count up to 90% if there's a signed lease. This treatment is a major reason some lenders 'work' for investors and others don't.

Question 4

I'm self-employed / contractor / ABN holder — can I still get a loan?

Accepted Answer

Yes. Standard self-employed lending requires two years of tax returns and financials. Some specialist lenders accept low-doc loans with one year of returns, BAS statements or accountant declarations — usually at slightly higher rates and with larger deposits. Recent business changes, low taxable income relative to revenue, or fluctuating earnings make scenario design important.

Question 5

Fixed vs variable vs split — how do I decide?

Accepted Answer

Fixed locks in certainty for 1–5 years but typically charges break costs if you sell, refinance or pay extra. Variable is flexible (offset, redraw, extra repayments) but exposed to rate moves. Split loans give some of both. The right choice depends on rate cycle expectations, your cashflow stability, and whether you're likely to sell or refinance in the fixed period.

Question 6

Offset account vs redraw facility — which saves more?

Accepted Answer

Mathematically they save the same interest. Practically: an offset is a separate transaction account, so funds remain accessible without affecting the loan structure (better for tax purposes if the property might become an investment later). A redraw facility puts extra repayments into the loan itself, which can taint deductibility on future investment use. For investors and likely-future-investors, offset is almost always preferred.

Question 7

Interest-only vs principal & interest — which is right for me?

Accepted Answer

P&I is standard for owner-occupied loans and pays the loan down faster. IO loans (typically 1–5 year IO period, then revert to P&I) preserve cashflow and maximise tax-deductible interest on investment loans. APRA caps how much IO lenders can write, so IO rates are usually slightly higher. Strategic investors often use IO on investment loans to fund the next deposit.

Question 8

LMI explained — when is it worth paying?

Accepted Answer

LMI is paid by you to insure the lender against your default — only worth it when the cost of waiting to save 20% (rising house prices, rent paid, lost compounding) exceeds the LMI premium. It can be capitalised onto the loan. First home buyers under the First Home Guarantee can avoid LMI with as little as 5% deposit.

Question 9

Pre-approval vs conditional vs unconditional approval — what's the difference?

Accepted Answer

Pre-approval: lender reviews income/expenses and indicates likely lending capacity, subject to property valuation and final checks. Usually valid 90 days. Conditional approval: formal approval subject to specific conditions (often valuation, building & pest, or solicitor sign-off). Unconditional approval: full approval, lender will fund. You should not exchange or bid at auction without at minimum a strong pre-approval — preferably conditional.

Question 10

What's on my credit file and how do I clean it up?

Accepted Answer

Australian comprehensive credit reporting captures repayment history (24 months), credit enquiries, current credit limits, defaults, court judgments and serious credit infringements. To improve: settle defaults, reduce credit card limits to what you actually need, avoid multiple credit applications in short succession, and maintain a clean repayment record for at least 6 months before applying. Buy-now-pay-later usage is increasingly visible to lenders.

Question 11

Why was I declined by one bank but approved by another?

Accepted Answer

Lenders apply different policies on the same scenario: how they treat overtime/bonuses/commission income, how they assess rental income on existing investments, what they accept as living expenses, how strict they are on credit history, what HEM they use, what employment categories they consider stable, and how they treat trust/company income. A skilled broker positions your scenario with the right lender first time.

Question 12

When is refinancing worth it and what should I avoid?

Accepted Answer

Worth it when: rate savings exceed switching costs over 18–24 months; you need to release equity for the next purchase; you want to restructure (e.g. add an offset, switch to interest-only, change ownership); or your current lender's policies are blocking your portfolio. Traps: cashback offers that come with above-market rates, breaking a fixed loan early, and resetting your loan term back to 30 years (extra interest over the life of the loan).

Question 13

How do guarantor loans work — and what are the risks for the guarantor?

Accepted Answer

A family member uses equity in their property as additional security, allowing you to borrow up to 100%+ of purchase price without LMI. Risks for the guarantor: their home is at risk if you default, their own borrowing capacity is reduced while the guarantee is in place, and removing the guarantee usually requires a refinance once you reach 80% LVR. Guarantors should get independent legal advice before signing.

Question 14

How do construction loans and progress payments work?

Accepted Answer

Construction loans drawdown in stages aligned to building milestones (slab, frame, lock-up, fixing, completion). You pay interest only on the drawn amount during construction. The lender requires fixed-price building contracts, council approvals, builder insurance, and progress claim certificates. Once construction is complete, the loan converts to a standard P&I or IO loan. Independent valuations occur at completion to confirm the as-built value.

Question 15

Why is SMSF lending different and harder to get?

Accepted Answer

Most major banks have exited SMSF lending. Remaining lenders (mostly second-tier and non-bank) require larger deposits (25–30%), charge higher rates (1.5–2% above standard), apply stricter serviceability and liquidity tests, and require specific Limited Recourse Borrowing Arrangement (LRBA) documentation including a bare trust. See our SMSF FAQ category for the full picture.

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