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From credit history to borrowing capacity, here are four common reasons home loan applications get declined in Australia and what you can do before you apply.
Having a home loan application declined after months of saving and property searching is one of the more deflating experiences in the buying process. It can also create an additional problem: each declined application generates a credit enquiry on your file, which can make the next application harder.
Most declines come down to a small number of recurring issues. Understanding them before you apply gives you a chance to address them, and it helps you approach the right lender for your situation rather than trying lenders at random.
Here are four of the most common reasons applications are declined, and what you can do about each one.
1. Your credit history has issues a lender won’t overlook
Every home loan assessment starts with your credit report. Lenders pull your file from one or more of Australia’s three main credit reporting bureaus, Equifax, Experian, and illion, and look at your history of managing debt.
What lenders focus on most includes missed or late repayments, defaults (where a debt went unpaid for an extended period and was listed on your file by a credit provider), court judgments, and the number of credit enquiries generated by applications you’ve made in the past twelve months.
A single missed repayment from several years ago will affect different lenders in different ways. Some will overlook it if the rest of your profile is strong. Others have policies that mean any listed default within a certain period is an automatic decline, regardless of the circumstances.
Multiple credit applications in a short window create a pattern that lenders notice. Each application for a credit card, personal loan, car loan, or home loan generates an enquiry on your file. Several enquiries over a few months can signal financial stress, even if each application was declined or you chose not to proceed.
What credit score do you need?
There is no universal minimum. Different lenders use different bureaus and different scoring models. On the Equifax scale, which runs from 0 to 1,200, most mainstream lenders want to see a score above 600, with scores above 700 putting applicants in a much stronger position. Non-bank lenders and specialist credit providers may consider lower scores, though the loan terms tend to reflect the risk.
How to improve your credit score in Australia before applying
Request your credit report before you apply. All three bureaus provide a copy at no charge once a year. Check for errors, outdated listings, or debts you weren’t aware of. Disputing incorrect information can remove it from your file.
From there, the most effective steps are straightforward: pay all bills and debt repayments on time, avoid making new credit applications in the period before your home loan application, and reduce the number of active credit accounts if you have more than you need.
Negative marks take time to recover from. Defaults stay on your credit file for five years. There’s no shortcut to removing a legitimate negative listing before it expires, but a file that shows clean repayment behaviour after a problem period can still be approved by the right lender.
| Item | Time on credit file |
|---|---|
| Late payment or missed repayment | 2 years |
| Default (unpaid debt listed by a credit provider) | 5 years |
| Court judgment | 5 years |
| Serious credit infringement | 7 years |
| Credit enquiry (from a loan or credit card application) | 5 years |
| Bankruptcy | 5 years from date of discharge |
2. Your borrowing capacity falls short of what you’re applying for
Lenders look at more than your income when they calculate how much you can borrow. They run a serviceability assessment that factors in your income, your existing financial commitments, your estimated living expenses, and a buffer above the current interest rate.
The buffer is set by APRA at 3% above the loan’s actual rate. A loan priced at 6.5% is tested at 9.5%. The question a lender asks isn’t whether you can afford the loan today; it’s whether you could still service it if rates rose to that higher level. For many borrowers, this buffer is the single biggest constraint on how much they can borrow.
Living expenses and how lenders assess them
Lenders use two approaches to living expenses. Some rely on a benchmark called the Household Expenditure Measure (HEM), which represents a modest but not austere level of spending for a household of your size. Others ask you to declare your actual expenses and then apply HEM as a floor.
If your declared expenses are below HEM, the lender substitutes HEM anyway. If your declared expenses are above HEM, the lender uses your higher figure. This means there is limited benefit in understating your expenses on a home loan application, and doing so can create compliance problems if the lender discovers discrepancies.
The credit card problem
Credit card limits reduce your borrowing capacity in a way that surprises many applicants. Lenders don’t assess how much you owe on a credit card; they assess the full credit limit as if you owed all of it. A credit card with a $15,000 limit but a $0 balance still reduces your borrowing capacity, because the lender has to account for the possibility that you max it out after your loan settles.
On a rough calculation, a $15,000 credit card limit can reduce your borrowing capacity by $60,000 to $70,000, depending on the lender and their serviceability methodology.
| Action | Likely impact on borrowing capacity |
|---|---|
| Close a $10,000 credit card limit | Can add $40,000 to $50,000 to borrowing capacity |
| Close a $20,000 credit card limit | Can add $80,000 to $100,000 to borrowing capacity |
| Pay out a $15,000 car loan | Removes committed expense, increases capacity |
| Remove a co-applicant whose debts outweigh income contribution | Can increase or decrease, depending on situation |
| Reduce declared living expenses to accurate (not inflated) levels | Modest improvement if expenses were overstated |
Estimates only. Actual impact varies by lender and individual circumstances.
Closing unused credit cards before you apply is one of the most effective steps many borrowers can take. You can always reapply for credit after your home loan settles. The short-term inconvenience is worth the increase in borrowing capacity.
Paying down personal loans and car loans also helps. Each existing repayment commitment reduces your assessed capacity for new debt. Eliminating those commitments in advance of a home loan application can make a meaningful difference to what a lender will approve.
3. Your income or employment situation creates uncertainty for the lender
Lenders build their assessment of your repayment ability around the assumption that your income is stable and ongoing. When that assumption is less certain, the application attracts greater scrutiny.
PAYG employment
For salaried employees, lenders want to see you as a permanent employee rather than on probation. Most lenders require at least three months of continuous employment in your current role; some ask for six months or more. If you changed jobs in the past few months, a lender needs to see that the change didn’t reduce your income and that you’re past any probation period.
Base salary is assessed in full. Overtime, commissions, and bonuses are treated differently depending on the lender. Some will assess 100% of regular bonuses if you can show a two-year history of receiving them. Others take only 50% or exclude variable income entirely, which can cut the income figure they work with by a large amount.
Self-employed home loans
Self-employed borrowers face the most complex income assessment. Most lenders require at least two years of personal tax returns and ATO Notice of Assessment documents. They also want two years of business financial statements: profit and loss statements, balance sheets, and often the business tax returns.
The income lenders use for a self-employed borrower is the lower of the two most recent years’ taxable income, averaged. This creates a specific challenge: many self-employed people use legitimate tax deductions and business structures that reduce their taxable income below what they earn in practice. The income that looks healthy in practice looks lower on paper.
If your business is less than two years old, most mainstream lenders will decline the application on policy grounds, regardless of how well the business is performing. Some specialist lenders will consider newer businesses with strong trading accounts, though the interest rate and deposit requirements tend to reflect the higher risk.
Lo-doc and alt-doc home loans were designed for self-employed borrowers. These products allow applicants to declare their income using an accountant’s letter or business bank statements rather than full tax documentation. They require a larger deposit (often 20% or more) and carry slightly higher rates, but they provide a path for borrowers who can’t meet standard documentation requirements.
Casual and contract workers
Casual employees often struggle with lenders that require evidence of ongoing employment. Most lenders want to see twelve months of continuous casual employment in the same role, with payslips showing consistent hours and income. Some lenders assess casual income at a percentage of the declared amount to reflect the risk of reduced hours.
Contract workers whose income matches their declared rate and who have a history of contract renewals can be assessed in the same way as permanent employees. The key is demonstrating continuity: a contractor who has worked in the same field with consistent income for two years presents a very different risk profile than someone who took up contract work in the past six months.
4. Your deposit or the property itself doesn’t meet the lender’s criteria
Beyond your personal financial position, the property itself can cause a decline.
Minimum deposit and LVR
Lenders express deposit requirements as a loan-to-value ratio (LVR). A 20% deposit means an 80% LVR. Most mainstream lenders will lend up to 80% LVR without requiring lenders mortgage insurance. Some will go to 90% or 95% LVR with LMI added to the loan.
The minimum deposit for a home loan varies by lender. For most mainstream products, 10% is the practical floor. Some lenders will consider 5% deposits for eligible borrowers, often under specific criteria or government schemes like the Home Guarantee Scheme.
What is lenders mortgage insurance?
Lenders mortgage insurance (LMI) is a one-off premium that protects the lender if you default and the property sells for less than the outstanding loan balance. It protects the lender, not you. You pay it, but the benefit runs to the lender.
LMI applies when you borrow above 80% LVR. The cost increases as the LVR rises. On a $700,000 loan at 90% LVR, LMI can add $15,000 to $25,000 to the cost of the purchase. This amount can be paid upfront or capitalised into the loan, which increases your total borrowing and the interest you pay over time.
| LVR | Deposit required | Approximate LMI cost |
|---|---|---|
| 80% | $140,000 | $0 |
| 85% | $105,000 | $5,000 to $8,000 |
| 90% | $70,000 | $15,000 to $20,000 |
| 95% | $35,000 | $25,000 to $35,000 |
Costs are estimates only and vary by lender, state, and individual loan structure.
Property types that create problems
Not every property qualifies for standard home loan terms. Lenders have policies around property types that affect their willingness to lend and the LVR they’ll approve.
Apartments in high-density buildings can trigger restrictions when the building is above a certain number of units or the individual apartment is below a minimum size. Many lenders apply a floor of 40 to 50 square metres for an apartment to qualify for standard terms, though this varies.
Properties in specific postcodes can attract reduced maximum LVR or outright declines from some lenders. Areas identified as having high vacancy rates, oversupply, or economic dependence on a single industry (mining towns, for example) may have postcodes on a lender’s restricted list that limits borrowing to 70% or 80% LVR regardless of the borrower’s financial position.
Rural and semi-rural properties on large blocks of land face different assessment criteria than residential properties in urban areas. Lenders assess the land and improvements separately, and their appetite for rural property varies.
Valuation shortfalls
Lenders don’t lend against the purchase price alone. They commission a valuation of the property and lend against the lower of the purchase price and the valuation figure. If the valuation comes in below the agreed price, the amount the lender is willing to advance falls too, which can leave a gap you’d need to cover from your own funds.
Valuation shortfalls are most common in competitive markets where buyers are bidding above a property’s estimated market value, or in areas where comparable recent sales are sparse.
What to do after a declined application
A declined application doesn’t mean the same outcome from every lender. Policies differ across lenders, and a borrower who doesn’t meet the criteria at one lender may qualify at another.
The most important step after a decline is understanding why the application was turned down. Lenders are required to tell you the general reason. Getting that information lets you address the specific issue rather than guessing.
Avoid making multiple applications in quick succession after a decline. Each application adds an enquiry to your credit file, and a cluster of recent enquiries signals credit stress to subsequent lenders. Taking time to address the underlying issue is more effective than applying to multiple lenders simultaneously.
A mortgage broker can help by reviewing your financial position, identifying which lenders’ policies suit your specific situation, and presenting your application in the best possible light before submitting it. Because brokers work across a panel of lenders, they can often identify a lender likely to approve your application before any credit enquiry is generated on your file.
Further questions
What credit score do I need for a home loan in Australia?
How do lenders calculate borrowing capacity?
How can I increase my borrowing capacity for a home loan?
How long does a default stay on my credit file in Australia?
Can I get a home loan if I'm self-employed?
This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.
