Red flags that make home loan lenders nervous

By Evlin DuBose · · 3 min read
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Collage of a man on a red speech bubble, like a red flag a home loan lender looks for in your mortgage application.

When applying for a home loan, making a good impression is essential. Lenders want to invest in borrowers who are safe bets, meaning they have financial stability, good credit, and a clear idea of what they can afford to buy. 

However, life is rarely simple, so normal everyday things like switching jobs or having children can sometimes give lenders the wrong idea – leading to a rejected mortgage application. 

So before clicking ‘submit’, check your home loan application for these common red flags.

1. New job or self-employed

Collage of a woman working from home.

Changing jobs can be exciting, scary, and necessary – often all at once. But while a new position is a great opportunity for you, lenders want to know you have a reliable income that can cover your mortgage repayments. By making a career change, you inadvertently throw your salary into question.

This is especially true if you are self-employed. Business can ebb and flow, but lenders love consistency. The more you can demonstrate that you’ll have a dependable cash stream, the less risky you seem.

You may have to opt for lenders with flexible payment schedules or show proof that you make hay while the sun shines and store the rest for a rainy day. 

Speaking of savings…

2. Spending your savings

Collage of a hand holding a credit card against online shopping.

If you’re applying for a variable home loan, lenders like to see that you can put a consistent amount of money into your savings each month – maybe even into an offset account. This way, you have some financial wiggle room when your interest rate and repayments inevitably change. 

If you aren’t saving, it could mean you’re too stretched, living beyond your means, or making frivolous purchases – all of which make you look risky.

As a rule of thumb, you shouldn’t spend more than 30% of your income on housing: anything more is considered mortgage or rental stress.

How much of my income should I save?

3. Outstanding debt

Collage of a house balanced against stacks of coins on a seesaw, like outstanding debt.

Lenders give your credit score a thorough check, so it’s always good to have a recent credit report from Experian, Illion, or Equifax in your back pocket when filing a mortgage application.

RELATED: What credit score do I need to get a home loan in Australia?

However, recent regulation changes mean lenders look at other kinds of debt besides personal loans and credit cards. How much of your HECS-HELP student loan debt is outstanding? What about Buy Now Pay Later? These can all affect how a lender sees you, since they don’t want a home loan to compete with your other debt obligations. 

Instead, try to consolidate or pay off as much as possible before taking on more debt.

4. Buying in a bad area

Collage of people leaping over a chasm.

During the formal application process, lenders will want to know what kind of property you’re buying, whether you plan to live in it, and what its value is (they’re not quite so interested if you’re just applying for home loan preapproval, as this just establishes how much you can borrow). 

Your property’s value not only establishes the size of your home loan but also your equity (also called your loan-to-value ratio). Your equity can fluctuate with property prices, so if the value of your home drops, it also lowers your equity. 

Especially if you plan to buy with a smaller deposit, lenders will want to know that you’re not in danger of sliding into negative equity, which can make you a home loan hostage, or, worse, a mortgage prisoner. 

Instead, invest in a sound property valuation and look at areas with potential for capital growth. If the value of your property increases, so does your equity, meaning you’ll automatically own a larger share of your home without having to lift a finger. Score!

For more information on how you could get accidentally trapped with your mortgage, check out our new home loan hostage report. 

Compare low interest rate home loans below.

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Last updated 27 July 2024 Important disclosures and comparison rate warning*

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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