If you’re applying for a home loan, one of the biggest surprises is how lenders calculate your income.
The bank doesn’t always use your full income.
Lenders apply their own rules to assess how much of your income is reliable and ongoing and that directly affects how much you can borrow.
Quick Summary
- Most lenders assess income over the past 1–2 years
- Variable income (bonuses, overtime, commission) is often reduced or averaged
- Rental income is usually discounted (around 70–90%)
- Self-employed income is based on tax returns, not revenue
- Your borrowing power depends on income AND expenses
How Lenders Calculate Your Income
Lenders aren’t just checking how much you earn – they’re evaluating how stable and consistent your income is.
Their goal is simple:
👉 Can you reliably repay this loan over the long term?
To do that, they break your income into different categories and apply specific rules.
How Different Types of Income Are Treated
Salary (Full-Time or Part-Time)
- Usually counted at 100%
- Considered the most stable form of income
Overtime, Bonuses & Commission
- Typically averaged over 1–2 years
- May be reduced to account for inconsistency
- Some lenders only include it if it’s regular and ongoing
Casual Income
- Often requires 6–12 months history
- May be reduced or averaged
- Some lenders are stricter with casual roles
Rental Income
- Usually only 70-90% is counted
- This accounts for vacancies, maintenance, and expenses
Self-Employed Income
- Based on tax returns (usually last 2 years)
- Lenders may use:
- The lower year
- Or an average of both years
- Add-backs (like depreciation) may be included
Why Your Borrowing Power Might Be Lower Than Expected
This often catches many borrowers off guard.
Even if your income looks strong, lenders may reduce it because:
- Your income varies from year to year
- You’ve recently changed jobs
- Some income sources aren’t guaranteed or consistent.
- You’re self-employed and your income isn’t consistent
Example
If you earned:
- $120,000 last year
- $80,000 the year before
Potentially, lenders calculate your income as:
- $80,000 (the lower year), or
- $100,000 (an average)
👉 Not the full $120,000
What Lenders Don’t Always Count
Lenders may exclude some income entirely, such as:
- One-off bonuses
- Irregular side income
- Temporary or short-term earnings
- Income without documentation
It’s Not Just Income – Expenses Matter Too
Your income is only half the equation.
Lenders also assess:
- Living expenses
- Existing debts (credit cards, personal loans, HECS/HELP)
- Number of dependants
👉 Even with a high income, large expenses can significantly reduce your borrowing capacity.
What Documents You’ll Need
To verify your income, lenders typically require:
Employees
- Recent payslips
- PAYG summary or income statement
- Employment letter (sometimes)
Self-Employed
- Last 2 years’ tax returns
- Financial statements
- Business activity statements (BAS)
Other Income
- Rental statements
- Lease agreements
- Bank statements
How to Improve Your Assessed Income
If you’re planning to apply for a loan, you can strengthen your position by:
- Reducing existing debts
- Avoiding large expenses before applying
- Keeping income consistent where possible
- Keep clear records of all your income.
- Speaking to a broker before making big financial changes
Common Questions
Do lenders use gross or net income?
Most lenders assess your gross income, but they factor in tax and expenses when calculating borrowing capacity.
How many years of income do lenders look at?
Usually 1-2 years, depending on the type of income, but as a mortgage broker we do have access to an extremely wide array of policies across all lenders. Lenders calculate your income differently according to their own internal credit policies and appetite for certain types of customer.
Do lenders include bonuses and commission?
es – but lenders often average it and may reduce the amount they count.
Can I get a home loan as a self-employed borrower?
Yes, but you’ll typically need 2 years of financials and consistent income. Again there are exceptions to this and we assess each client on a case by case basis and match them to an appropriate lender.
Final Thoughts
Lenders don’t just look at how much you earn – they look at how reliable your income is.
That’s why two people earning the same amount can end up with very different borrowing capacities.
Need Help Understanding Your Borrowing Power?
Online calculators only give rough estimates.
To understand how lenders assess your income – and what you can realistically borrow -speak with a broker for tailored advice.
Get in touch today to have your income properly assessed and avoid surprises during the application process.