By Philippa Billings, Chief Advice Officer, Otivo
Here's the detail that surprises most first home buyers when they finally see how a lender does the sums. That credit card with a $15,000 limit and nothing on it isn't treated as a zero. Lenders assess the limit, not the balance, because the limit is what you could draw tomorrow. An unused card can quietly remove tens of thousands from what a household can borrow, and closing it takes ten minutes. That's one of five things a lender looks at, and most of them can be improved before an application rather than after a knockback. Here's the order worth doing them in.
Before applying for a home loan, lenders assess five things: your credit report, your income, your living expenses, your deposit and loan-to-value ratio, and your existing credit limits. APRA also requires lenders to assess repayments at the loan rate plus a serviceability buffer of three percentage points, which reduces borrowing capacity by roughly 15 to 20%.
The five things a lender checks
An application is really five separate assessments happening at once. Knowing which is which makes it clear where effort pays off.
- Your credit report. Repayment history, credit enquiries, defaults and any hardship information.
- Your income. Amount, and just as importantly how stable and how documented it is.
- Your living expenses. Verified against bank statements, not taken on trust.
- Your deposit and loan-to-value ratio. How much you're contributing, and whether lenders mortgage insurance applies.
- Your existing credit limits and other debts. Assessed on limits and commitments rather than current balances.
The fifth is the one most easily changed. The first is the one that takes longest to change, which is why it's worth looking at earliest.
How do you check your credit report before a lender does?
Every Australian is entitled to a free copy of your credit report. The three credit reporting bodies operating in Australia are Equifax, Experian and illion, and a free report can generally be requested from each of them every three months.
Worth pulling all three rather than one. They hold different information, because not every lender reports to every body, and an error on one won't necessarily appear on the others.
What to look for is fairly mechanical. Accounts that aren't yours. Defaults that were paid but never marked as such. Old accounts still showing as open. Repayment history that doesn't match reality. Errors can be disputed directly with the credit reporting body at no cost, and correcting one takes weeks rather than days, which is the argument for doing it well before an application.
A credit score is a summary of the report rather than a separate thing. ASIC's MoneySmart has guidance on what affects a score and how to improve one, and none of it is quick — which again argues for early.
Why does the serviceability buffer matter so much?
Because it's the difference between what a household can afford and what a lender will lend.
APRA requires lenders to assess a borrower's capacity to repay at the loan's interest rate plus a buffer of at least three percentage points. A loan offered at 6% is assessed at around 9%. That reduces borrowing capacity by roughly 15 to 20% compared to an assessment at the actual rate.
The buffer has been at three percentage points since October 2021, and APRA confirmed in 2026 that it stays there, citing high household debt and continued economic uncertainty.
There's a second constraint operating alongside it. From February 2026, APRA has limited banks to writing no more than 20% of new owner-occupied and investor loans at debt-to-income ratios of six or above. For a household on $150,000 combined, that means total debt above about $900,000 falls into a restricted bucket — not prohibited, but competing for a limited share of the lender's book.
What does the deposit actually change?
Two things, and only one of them is obvious.
The obvious one is loan size. A larger deposit means a smaller loan, smaller repayments and less total interest.
The less obvious one is the loan-to-value ratio, calculated as the loan divided by the property's value. LVR determines whether lenders mortgage insurance applies. LMI protects the lender, not the borrower, and is generally required where the LVR exceeds 80% — which is where the conventional 20% deposit figure comes from.
Where LMI applies, the premium can be paid upfront or capitalised, meaning added to the loan and paid off with it over the loan's life. Capitalising costs more overall because interest is charged on it.
Some Australians access the First Home Guarantee, a federal scheme allowing eligible first home buyers to purchase with a smaller deposit without paying LMI, subject to income and property price limits that are reviewed periodically. And for those saving a deposit over several years, using super towards a first home deposit through the First Home Super Saver Scheme is another route worth understanding, with its own limits and deadlines.
How do lenders assess expenses?
Not from what you tell them. From your bank statements.
Lenders request recent statements and payslips and build an expenses figure from what's actually there, generally benchmarked against a household expenditure measure to catch under-reporting. A household that estimates $3,000 a month and shows $4,200 will be assessed on something closer to the second figure.
This is where existing credit limits do their damage. A $15,000 credit card limit is typically assessed as a monthly commitment based on the limit, even if the card is never used. Same for an unused overdraft, and buy now pay later arrangements are now regulated as credit and appear in credit reporting, which means they show up too.
The practical consequence is that reducing or closing unused facilities before applying can improve capacity more than a few months of extra saving. Knowing the household's real expenses figure before a lender calculates it is a reasonable first step, and the budget planner does that quickly.
What costs come after the loan is approved?
Settlement is when ownership transfers and the balance of the purchase price is paid. The costs around it are separate from the deposit and generally need to be available in cash.
- Transfer duty, previously called stamp duty, set by each state and territory, with concessions that vary by state and buyer type.
- Mortgage registration and transfer registration fees.
- Conveyancer or solicitor fees.
- The lender's valuation fee, where charged.
- Building and pest inspections, which are optional and generally worth the cost.
- Building insurance, which lenders typically require to be in place before settlement.
- Adjustments for council rates and any land tax already paid by the seller.
Transfer duty is usually the largest of these by a wide margin and the one that varies most. Your state or territory revenue office publishes current rates and the concessions available.
Frequently asked questions
How do I get a free credit report in Australia?
Request it directly from the credit reporting bodies — Equifax, Experian and illion. Each generally provides one free report every three months. Pulling all three is worth doing, since they hold different information.
Do lenders count my credit card balance or my credit limit?
The limit. Lenders assess what could be drawn, not what's currently owed, so an unused card with a high limit still reduces borrowing capacity. Reducing or closing unused facilities before applying can increase capacity.
What is the APRA serviceability buffer in 2026?
Three percentage points. Lenders must assess a borrower's ability to repay at the loan rate plus that margin, so a 6% loan is assessed at around 9%. It has been at three points since October 2021.
Do I need a 20% deposit to buy a home?
No, though lenders mortgage insurance generally applies where the loan-to-value ratio exceeds 80%. The First Home Guarantee allows some eligible first home buyers to purchase with a smaller deposit without LMI, subject to eligibility limits.
How much should I budget for settlement costs?
It depends heavily on the state and the property price, with transfer duty the largest component. Your state or territory revenue office publishes current rates and any concessions you may be eligible for.
The pattern across all five checks is that most of them respond to preparation, and preparation takes weeks rather than days. Otivo provides regulated digital financial advice under AFSL and Australian Credit Licence No. 485665, and its debt advice looks at existing commitments and repayment capacity against actual household income and expenses.
Sources
- Australian Prudential Regulation Authority, macroprudential policy settings, 2026.
- Australian Prudential Regulation Authority, Prudential Practice Guide APG 223 Residential Mortgage Lending.
- ASIC MoneySmart, Credit scores and credit reports.
- ASIC MoneySmart, Lenders mortgage insurance.
- Australian Registrars' National Electronic Conveyancing Council, state and territory revenue office directory.
Disclaimer
The information in this communication is current as at August 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.