How banks assess serviceability (the detailed version)
If you have read [how much you can borrow](/articles/home-loans/how-much-can-i-borrow) and want to understand what is actually happening inside the lender's assessment, this is the technical companion. Serviceability is the calculation a lender runs to decide whether you can afford a loan — and understanding its moving parts helps you see why lenders reach different answers for the same applicant, and where your own application can be strengthened.
The basic equation
At its core, a serviceability calculation is: assessable net income, minus verified living expenses, minus existing commitments, minus the buffered repayment on the proposed loan. If what remains — often called net surplus or, in ratio form, the net income surplus or debt service ratio — clears the lender's threshold, the loan services. Every input in that equation involves policy judgement, and that is where lenders differ.
### Net income, not gross
Lenders assess income after tax. Their calculators apply current tax rates and the Medicare levy to convert your gross salary into net monthly income. This matters for comparisons: an extra $10,000 of gross salary adds less than $10,000 of assessable capacity, because it is taxed at your marginal rate. Salary packaging and novated leases complicate the picture — some lenders add back part of packaged amounts, others treat the lease as a commitment. If your pay structure is unusual, lender choice matters.
Shading: how variable income gets a haircut
"Shading" is the practice of counting only a percentage of income that is not guaranteed:
- Overtime and shift allowances — commonly shaded, though some lenders accept them in full for essential services workers such as nurses, paramedics and police.
- Bonuses and commission — usually assessed on a one-to-two-year history, often at a discount, and sometimes averaged across years.
- Rental income — typically shaded to allow for vacancy and property costs; some lenders also deduct property expenses on top.
- Casual income — usually needs a minimum tenure and may be annualised conservatively.
- Self-employed income — generally averaged over one or two years of returns, with add-backs for depreciation or one-off costs at some lenders. See our note on [self-employed home loans](/articles/credit-and-approval/self-employed-home-loans).
The practical takeaway: if a big slice of your income is variable, the gap between lenders can be dramatic, because a lender that shades overtime lightly may lend substantially more than one that shades it heavily.
HECS/HELP and other deductions from pay
Compulsory HECS/HELP repayments are income-contingent — a percentage of your income that rises as you earn more — and they reduce the net income available in the assessment. Lenders generally treat the repayment as an ongoing commitment while the debt exists. Child support, salary garnishees and similar deductions are handled the same way. Whether it is worth paying out a HECS balance before applying depends on the balance, your income and your deposit; our [HECS and borrowing power guide](/articles/credit-and-approval/hecs-help-borrowing-power) works through the trade-offs.
A 15-minute chat is usually enough to map your options — free, no obligation.
Credit cards: limits, not balances
A credit card is assessed as if fully drawn, regardless of the balance. Lenders typically convert the limit into a notional monthly repayment — commonly around 3-4% of the limit per month, depending on the lender. That means a $15,000 limit can reduce your capacity by roughly the same amount as a genuine ongoing debt, even if you pay it off in full every month. The same logic increasingly applies to buy now, pay later facilities and store cards. Reducing limits before applying is a legitimate, effective lever.
Living expenses: declared, benchmarked, verified
Lenders take your declared monthly expenses and compare them against the Household Expenditure Measure (HEM) benchmark for your household size, location and income band — then use the higher figure. Beyond the benchmark, many lenders verify: they review your bank and card statements (usually the most recent 90 days) looking for regular commitments you did not declare — subscriptions are rarely the issue; undisclosed loan repayments, gambling patterns, or consistent spending far above your declaration are. Expenses that will genuinely stop after settlement, such as rent when you are buying your own home, are generally excluded — but you may need to note that clearly. Dependants raise the benchmark, and some lenders ask about private school fees and childcare specifically.
The buffer rate and existing debt
The proposed loan is not assessed at your actual rate. Lenders apply a serviceability buffer — regulator guidance has it at around 3 percentage points above the actual rate — or a floor rate, whichever is higher. Crucially, the buffer is also applied to your existing home loan debts, which is why some borrowers who took loans at low rates find it hard to refinance later even though they have never missed a repayment. A small number of lenders offer reduced-buffer assessments for like-for-like refinances in limited circumstances; policy in this area changes, so treat it as a question for your broker rather than a rule.
Why this matters for your application
Serviceability is policy-driven, and policy is chooseable. Before you apply anywhere:
- Know how your income mix will be treated — base, overtime, bonus, rental.
- Reduce card limits and clear small debts where practical.
- Keep your last 90 days of statements clean and consistent with your declared expenses.
- Run an estimate with our [borrowing capacity calculator](/calculators/borrowing-capacity), then test it against real lender policy before you rely on it.
A failed application leaves a credit enquiry on your file, so it pays to aim at the right lender the first time. Our guide to [improving approval chances](/articles/credit-and-approval/improve-approval-chances) covers the preparation timeline.
Talk it through with a broker
Serviceability policy is exactly the sort of detail a broker deals with daily — which lender shades your overtime least, how your HECS affects the numbers, and where your profile fits best. [Talk to us](/contact) before you lodge anything.
Frequently asked questions
What is income shading?
Shading means a lender counts only a portion of income that is not guaranteed — such as overtime, bonuses, commission or rent — to allow for the chance it reduces or stops. The percentage and the history required vary by lender, which is why variable-income earners see big differences between lenders.
Why are credit cards assessed on the limit instead of the balance?
Because you can draw the full limit at any time, lenders must assume you might. They convert the limit into a notional monthly repayment and include it as a commitment. Cutting limits you do not use directly increases your assessed capacity.
Do lenders really check my bank statements for spending?
Many do, typically the most recent 90 days. They are looking for undisclosed debts, regular commitments, and spending patterns clearly inconsistent with your declared expenses. Ordinary living costs are expected — unexplained loan repayments or heavy gambling activity are the red flags.
What is the serviceability buffer?
It is a margin — regulator guidance puts it at around 3 percentage points above your actual rate — added to the assessment to make sure you could still afford repayments if rates rose. It applies to the new loan and generally to your existing home loan debts as well.
Does rent I currently pay count against me if I am buying a home to live in?
Generally no — rent that ceases when you move into your new home is excluded from ongoing expenses, though the lender may factor in your housing costs differently if you will keep renting. Make sure the application clearly states the rent will stop at settlement.
Can two lenders really give different maximum loan amounts on the same application?
Yes, and routinely. Differences in shading, HECS treatment, expense benchmarks, buffer floors and card assessment compound, so the same applicant can see materially different maximums across lenders.