How Lenders Assess Income

Why borrowing outcomes depend on income reliability, not just income amount

Australian lenders do not assess income purely by how much is earned.

Instead, income is evaluated through a risk-based framework designed to determine whether loan repayments can be sustained consistently and under stress over time.

This means two borrowers with similar earnings can receive very different lending outcomes, depending on:

• stability of employment or business activity
• variability of earnings across time
• likelihood income will continue
• legal and contractual enforceability of payment

This page explains how income is assessed inside lender serviceability models, not how much a particular person can borrow.

The purpose of income assessment in lending

Income assessment is not designed to measure today’s affordability.

Its purpose is to test whether repayments would likely remain manageable if conditions deteriorate, including:

• interest rate increases
• reduced working hours or income interruption
• higher living expenses or financial commitments
• economic or employment instability

For this reason, lenders apply conservative recognition rules rather than relying on gross income figures.

Risk-weighted income recognition (“income shading”)

Before income is used in serviceability calculations, it is usually adjusted or discounted.

These adjustments reflect perceived risk in the income source, including:

• employment stability and history
• variability or seasonality of earnings
• probability the income will continue
• contractual certainty and enforceability

This process is commonly referred to as income shading.

Shading does not mean income is ignored.

It means income is recognised at a level lenders consider sustainable, rather than temporary or uncertain.

Employment income assessment

Permanent PAYG income

Ongoing salary from permanent employment is typically treated as the most stable income type, particularly where:

• employment history is continuous
• probation has been completed
• industry and role are considered secure

Because of this stability, permanent PAYG income is often recognised at or near full value, subject to lender policy.

Probationary, casual, and contract employment

Income from less secure employment structures may require:

• longer employment history
• evidence of continuity in the same industry
• confirmation of ongoing work availability

Some lenders may:

• discount the income
• average earnings across a longer period
• decline to use the income until stability is demonstrated

Bonuses, overtime, and commissions

Variable employment income is usually:

• averaged across a defined period (often one to two years)
• capped at a percentage of total earnings
• excluded if history is too short or inconsistent

Different lenders apply different averaging rules, which can materially change borrowing outcomes.

Continuity of employment is often more important than recent pay increases.

Self-employed and business income

Self-employed income is typically assessed using:

• recent financial statements
• tax returns
• Business Activity Statements (BAS)
• accountant declarations or add-backs

Common assessment approaches include:

• averaging income across the last two years
• using the most recent year if performance is clearly improving
• applying discounts where income is volatile or uncertain

Because policies vary between lenders,

recognised income can differ significantly even with identical financials.

Rental and investment income assessment

Rental income is rarely assessed at the full amount received.

Instead, lenders usually apply a reduced recognition level to allow for:

• vacancy periods
• property management costs
• maintenance and repairs
• market variability

Short-term accommodation or holiday letting income is often treated more conservatively than long-term residential rent due to:

• higher variability
• reliance on occupancy levels
• sensitivity to economic conditions

Foreign income and cross-border complexity

Foreign-sourced income introduces additional risk considerations, including:

• currency volatility
• taxation and jurisdictional differences
• enforceability of employment arrangements
• transferability of funds into Australia

As a result:

• fewer lenders may accept the income
• recognised income may be reduced
• evidence requirements are typically higher

This explains why otherwise strong overseas earners may face restricted borrowing options.

Policy variation between lenders

Income assessment is not uniform across the lending system.

Different lenders may:

• accept or exclude certain income types
• use one-year vs two-year averaging
• recognise improving self-employed income differently
• apply different shading percentages
• impose stricter evidence requirements

Because of this variation,

borrowing capacity is shaped not only by income itself,

but by which lender’s policy framework is applied.

Income assessment within overall serviceability

Income is only one component of serviceability testing.

Lenders also evaluate:

• living expenses
• existing debts and commitments
• interest rate stress buffers
• household structure and dependants

Final borrowing outcomes therefore reflect the interaction of income with all other financial factors, not income in isolation.

Key structural principles

Across Australian lending systems:

• Income amount alone does not determine borrowing capacity.
• Stability and likelihood of continuation are central.
• Variable or complex income is usually discounted or averaged.
• Lender policy differences can materially change outcomes.
• Income assessment always occurs within full serviceability testing.

Understanding these mechanics explains

why similar earners can receive very different lending decisions.

Scope of this explanation

This page describes how lenders assess income within credit frameworks.

It does not:

• calculate borrowing capacity
• recommend any borrowing strategy
• assess individual circumstances
• compare lenders or loan products

All lending outcomes depend on full assessment at the time of application..