Income and Employment: What Lenders Assess

Lenders assess income stability and employment structure before approving any home loan application.

Your ability to service a loan depends on how consistently you can demonstrate income and how a lender categorises the source. A permanent employee with two years of payslips presents differently to a contractor with variable monthly deposits, even if both earn similar amounts over a year. Lenders apply different serviceability tests depending on whether you are employed full-time, part-time, casual, self-employed, or working on contract. The treatment of bonuses, overtime, and commission also varies between lenders, and understanding these distinctions matters when you want to maximise your borrowing capacity.

How Lenders Treat Permanent Employment

Permanent employees are assessed on their base salary, with most lenders requiring a minimum of three to six months in their current role. If you have been with the same employer for more than six months and receive regular fortnightly or monthly pay, lenders will generally use 100% of your base income when calculating serviceability. Overtime and bonuses are treated separately and may be shaded or excluded depending on how long you have been receiving them and whether they appear consistently across payslips and tax returns.

Consider a buyer working as a project manager in South Yarra on a base salary plus a quarterly performance bonus. The base salary is accepted in full, but the bonus is only included if it has been paid consistently for at least 12 months and appears on the most recent Notice of Assessment. One lender may accept 80% of the average bonus, another may require two years of history before including any portion, and a third may exclude it entirely. The approach depends on the lender's credit policy and the documentation you can provide.

Casual and Part-Time Income

Casual and part-time employees are assessed on their average income over a defined period, typically six to 12 months. Lenders require payslips, a letter from the employer confirming ongoing work, and often the most recent tax return to verify declared income. Some lenders will only accept casual income if you have been with the same employer for at least 12 months and can demonstrate regular shifts or rostered hours.

In a scenario where a casual worker in retail has been employed at the same business in Prahran for 18 months with consistent weekly shifts, most lenders will assess income based on the average of the past six months of payslips. If hours fluctuate significantly between periods, the lender may apply a conservative calculation or request an employer letter confirming that hours are expected to continue. This becomes more difficult if you have recently changed employers or moved from full-time to casual status, even if your income has remained stable.

Self-Employed Borrowers and Tax Returns

Self-employed applicants are assessed on their tax returns rather than payslips, and most lenders require a minimum of two years of financials before approving a home loan. Sole traders, partnerships, and company directors are all treated as self-employed. Lenders use the taxable income figure shown on your Notice of Assessment, and many will also add back certain non-cash deductions such as depreciation when calculating serviceability. The percentage added back varies by lender and depends on the structure of your business.

If you operate as a sole trader in Glen Iris and have been in business for three years, the lender will request your last two full tax returns, a profit and loss statement for the current year, and may also ask for business activity statements or accountant-prepared financials. A director of a company with less than 20% ownership may be assessed as an employee if they receive a regular salary through PAYG, but a director with more than 20% is generally treated as self-employed regardless of how they are paid. This distinction affects documentation requirements and the income calculation method applied.

Contractors and ABN Holders

Contractors who invoice through an ABN are generally assessed under self-employed policies, even if they work for a single client on an ongoing basis. Some lenders offer alternative assessment methods for contractors in specific industries such as information technology or healthcare, where contract work is common and income is relatively stable. These programs may allow a 12-month contract and recent invoices to be used instead of two years of tax returns, but they typically come with higher interest rates or reduced loan-to-value ratios.

If you have been contracting as a software developer in the Melbourne CBD for 18 months and earn a consistent monthly rate, a handful of lenders will assess your application using your contract and recent bank statements showing regular deposits. Others will not consider the application until two full tax returns are available. The difference in approach can determine whether you can proceed with a purchase now or need to wait another six to 12 months. This is one area where lender selection has a direct impact on timing.

Probation Periods and Job Changes

Most lenders require you to have completed any probation period before they will approve a home loan, though some will accept an application if you are still on probation and can provide an unconditional written offer of ongoing employment. If you have recently changed jobs within the same industry and at the same or higher income level, lenders are generally comfortable proceeding once probation is complete. A change of industry or a reduction in income requires more explanation and may result in declined applications or conditional approvals that depend on completing a minimum period in the new role.

A teacher moving from one school to another in Malvern will generally be approved without difficulty once probation ends, provided the income and employment type remain similar. A finance professional moving from permanent employment to a contract role in the same field presents more complexity, as the income type has changed and most lenders will reclassify the assessment method accordingly.

How Lenders Verify Income and Employment

Lenders verify income by requesting recent payslips, a letter of employment, and tax returns where applicable. Employment is verified directly with your employer or through third-party services that confirm your role, tenure, and ongoing status. Some lenders contact employers by phone, others send a standard verification form, and a growing number use automated employment verification platforms linked to payroll providers. This process occurs before formal approval and again in the days leading up to settlement.

If you change jobs or reduce your hours between pre-approval and settlement, you are required to notify your lender immediately. A change in employment or income after contracts are signed can result in a withdrawn approval, and in some cases the lender may require you to reapply under the new circumstances. This has financial consequences if you are unable to settle and the vendor pursues damages.

Income Shading and Lender Policy Differences

Income shading refers to the practice of applying a percentage reduction to certain income types when calculating serviceability. Commission, overtime, rental income, and investment distributions are all commonly shaded. One lender may accept 80% of average overtime, another may accept 100% if it has been received for two years, and another may exclude it entirely. These differences are not always disclosed upfront and often only become apparent when a formal assessment is completed.

We regularly see applicants assume their full income will be used in serviceability calculations, only to find that a portion has been excluded or heavily shaded. If a significant part of your income comes from overtime, bonuses, or rental properties, it is worth understanding how different lenders treat those income sources before deciding where to apply. A loan health check that includes a serviceability assessment across multiple lender policies can identify which institutions will give you the most favourable treatment based on your specific income mix.

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