When determining your home loan eligibility, the first question always asked is “What’s my borrowing power?”
The answer of course, depends. There’s a little bit of a science to it.
Whilst your lender has rules to follow when assessing your home loan application (such as collecting adequate proof of income), they generally make up their own rules (known as a credit policy). This can directly impact your home loan eligibility.
How to read this article…
There’s three parts to determining your home loan eligibility, with regards to your income…
- What is Assessable Income?
- View Income Verification Matrix, so you can take a birds-eye view of the various income types and lender policy for verification of that income.
- As usual, we dig in to the details with explanations and Case Studies.
If you read the entire article, you’ll get explanations of credit policies and insider secrets, that will help you properly prepare for your loan application and give you the best chance of getting just the right loan.
(If you’re self-employed check this article out, as we’re only talking about PAYG income here).
What is Assessable Income?
Assessable income is where your lender applies their own credit policy to your income, when determining your home loan eligibility.
It’s the amount of your income they’re prepared to use in their assessment of your borrowing power.
There are usually various factors about your employment and income that impact whether your income is acceptable, and if so, whether 100% of that income is acceptable.
Every bank has their own unique rules (credit policy).
The do however need to adhere to the National Consumer Credit Protection (NCCP) Act, and must:
- Make reasonable enquiries about your financial situation, requirements, and objectives.
- Take reasonable steps to verify your financial situation.
But as stated above, they have their own credit policy. There’s no universal borrowing power calculation that the whole industry must adhere to.
Therefore, whilst verifying your income – your lender can pick and choose what type of income they accept. Your income may not actually be 100% acceptable (due to employment type, the type of income, the length of your employment, or any other factor they deem necessary to apply).
Some income types are only accepted to 50% or 80% of the actual amount earned, or not at all. This obviously affects your borrowing power significantly, so it pays to shop around if you’re not getting the result you’re after.
A point to remember if you think your lender is being harsh – you have data on probably just the one person (you).
And your lender has data on probably millions, so they know where the trends lie and what risks they want to take.
Luckily, the credit policies can be very different from bank-to-bank.
Proof of Income Matrix:
The Proof of Income Matrix provides you with a good overview of all lenders home loan eligibility policies for various income types.
Understanding exactly how lenders assess your borrowing power helps ensure you get the right loan, first time. That’s why we’re teaching you all of this. To help you make better choices, and understand why you make those choices.
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Your Borrowing Power depends on your income’s finer details…
The first step, is to determine employment type and income types.
- Full time
- Part time
- Something else?
What income types do you earn?
You’ll need to provide evidence, so double check employment contracts and pay slips to see how your income is broken up. Pay slips should also include the Year-to-Date amounts for each income type.
- Base salary/wage
- Allowances – Car, shift, or some other allowance?
- Hourly rate? (Are you only paid for number of hours worked?)
Please note, if you earn additional non-base income (eg. commission, bonus, overtime, allowance, etc) you may need to provide evidence of the ongoing and continuing nature of that income.
- Length of employment. Have you changed jobs in the last year, how does your ongoing employment history and income look?
- Probationary period? (choose a lender that accepts probation!)
- Maternity leave? (do you need your return-to-work income to get a loan? If so, choose the right lender!)
- Length of income (Minimum verification periods can vary bank-to-bank. For example, casual or commission income might need to be earned consistently 1 year before any of it is acceptable to your lender)
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Full-time or Part-time Employees…
If you know that your base pay easily satisfies your borrowing power (excluding any extra’s like commission, overtime or allowances), you’ll find the proof of income process very smooth and easy.
But if your application is reliant on allowances, commission, overtime, or if you have a company car, you might need to shop around to find the lender that suits you the best.
If you’re permanent Full-time or Part-time:
- You will have a minimum base pay amount
- You’ll be getting holiday and sick leave entitlements
Are you on probation? Or Started a new job in the last 6-12 months?
Many lenders refuse your home loan application if you’re on probation, because your borrowing power is $0. They won’t accept your income. Proof of income won’t matter.
However, if you’ve got a solid employment history in similar roles you shouldn’t have any problems finding a suitable lender whilst you’re on probation, it might just take a little shopping around.
If your loan requires Lenders Mortgage Insurance, it may also impact whether or not your selected lender can overcome the probation issue.
Additionally, it’s likely you’ll be asked for written proof that you’re not on probation if you’ve started a new job within the last 6-12 months.
If your income includes Overtime or Commission…
Acceptance for overtime and commission income can vary a lot. And whilst overtime and commission are treated separately and your lender may have a different policy for each, the process will remain the same.
That process will be something like:
- Obtain satisfactory proof of income – verifying both the recent history and it’s continuity. And;
- Reduce the actual income used during the assessment of you borrowing power (eg. if your lender accepts 80% of that particular income type, they’ll multiply the income by 80% for use in your borrowing power assessment).
Proof of income for overtime or commission must generally prove that it is a ‘required component of your employment’ before being accepted.
Usually, around 80% is accepted, with a minority of lenders going up to 100%.
Overtime and Commission Income Case Study:
Pay Date: November 1
Base Wage (Year to Date) $34,654
Overtime (Year to Date) $522
Commission (Year to Date) $1,541
Total paid (Year to Date) $36,717
- It’s possible that with such a low overtime amount that your lender could refuse to consider overtime, as it doesn’t appear to be very regular this year.
- If your lender only accepts 80% of your overtime or commission, the income they use within the calculation will be reduced (eg. Commission amount would be $522 x 80%). In this case study, that reduction is not significant and is unlikely to effect the outcome of your application.
- If your lender accepts 3 months year to date overtime, you may not need additional income verification.
- You might need the last PAYG Summary to verify how much last years earnings exceeded your base wage (for lenders that require more than 3 months verification).
Are you paid a Bonus?
Unlike overtime and commission, bonus income is commonly disallowed completely due to its irregular nature. Although plenty of lenders out there are happy to take it on board…
When compared to overtime or commission however, it’s more common for bonus income to be verified over a longer period of time when compared with overtime and commission income (such as requiring a minimum of 1 or even 2 years history).
If you need 100% of your bonus income to service your debt, your options will be few. But most will allow around 50%.
Bonus Income Case Study:
Pay Date: November 1
Annual Base Wage $75,000
Base Wage (Year to Date) $24,987
Bonus (Year to Date) $0
Total paid (Year to Date) $44,987
PAYG Summary for last year $98,904 (therefore last years bonus = $23,904)
You advise the lender that your bonus is paid twice yearly, end of December and end of June.
- Many lenders require year-to-date earnings therefore NIL Bonus can be used in the application. No exceptions.
- However, if your lender accepts prior years bonus, and reduce to 50% of your earnings, the income they use will be reduced (eg. Bonus amount would be $23,904 x 50% = $11,952)
- You’ll definitely need the last PAYG Summary to verify how much last year’s earnings exceeded your base wage, given such a high percentage of your income is commission
- It’s likely that your lender may require 1 or 2 years PAYG Summary (or Tax Returns) to verify your bonus over a longer period of time.
Are you paid a Car Allowance… Or some other Allowance?
Other allowances are generally acceptable and sometimes allowable up to 100%, depending on the type of the allowance.
If your allowance is disallowed by a lender, it will be deemed by that lender that you need that allowance for your employment and any benefit you derive is spent by you in the course of doing your job.
For lenders that accept your allowance, you’ll need written verification that it’s a permanent part of your employment.
Do you have a Fully-maintained Company Car?
Is your company car that available for personal use?
This is a beauty, and can boost your borrowing capacity significantly – provided your lender actually allows it.
It’s reasonable to expect that everyone has a car nowadays, and minimum living costs that your lender will use when assessing your application will in fact include amounts to use and maintain a vehicle.
Therefore, many lenders will boost your income (rather than decrease your living costs) to make an allowance for your adjusted living costs. It really helps your borrowing power.
The income adjustment varies as follows:
- From $0 (no adjustment), right up to $7,800 boost to your net (after-tax income).