Income & Serviceability Assessment

Income alone does not determine borrowing capacity.

The Australian lending system assesses serviceability, not earnings — meaning it evaluates whether debt repayments can be sustained under stressed conditions, not whether they are affordable today.

This framework explains why:

• high earners can be declined
• strong cash flow does not equal high borrowing power
• different income types receive different treatment
• similar borrowers receive materially different outcomes

What This Framework Controls

The Income & Serviceability Assessment framework determines:

• maximum borrowing capacity
• how income is recognised or discounted
• how liabilities are stress-tested
• repayment buffers applied to loans
• when borrowing capacity “caps out”

It operates independently of property value or deposit size.

Serviceability vs Affordability

Serviceability is not lifestyle affordability.

Lenders assess:

• whether repayments can be met at higher interest rates
• whether income is stable, ongoing, and predictable
• whether liabilities can be sustained under stress

This creates conservative outcomes even for cash-flow-positive borrowers.

Income Is Risk-Weighted

Most income is not taken at face value.

Instead, income is adjusted based on:

• reliability
• consistency
• legal enforceability
• volatility

This adjustment is known as shading or haircutting.

Employment Income Treatment

Employment structure matters as much as salary level.

Generally:

• permanent PAYG income receives the highest acceptance
• probation, contract, or casual income may be discounted
• bonuses and overtime are averaged and capped

Continuity is prioritised over upside.

Rental Income Assessment

Rental income is treated conservatively.

Typical system treatment:

• 
  
• long-term residential rent: ~75–80% accepted
• short-term or Airbnb rent: ~50% accepted
• managed or pooled income: further restrictions may apply

Operating costs and vacancy are assumed regardless of actual results.

Foreign and Overseas Income

Foreign income introduces additional risk layers.

Lenders assess:

• currency stability
• country risk
• enforceability of employment contracts

As a result:

• income is often discounted
• lender availability narrows
• borrowing capacity reduces

These adjustments reflect currency and jurisdiction risk, not income quality.

Existing Liabilities and Stress Testing

All liabilities are reassessed under stress.

This includes:

• home loans
• investment loans
• personal debt
• credit cards (assessed at limits, not balances)

Even unused credit limits reduce capacity.

Living Expenses

Living expenses are a material input into serviceability assessment and can significantly affect borrowing capacity. Lenders assess living expenses by comparing declared costs against benchmark measures such as the Household Expenditure Measure (HEM). Where declared expenses are below benchmark, lenders will typically apply a higher assumed expense to reflect average household costs and introduce a buffer for variability.

Where expenses are above benchmark, lenders assess whether those costs are:

ongoing and structural, or temporary and non-recurring (for example, relocation or one-off transition costs).

Some lenders may make allowances for clearly documented, one-off expenses, while others will treat higher expenses as ongoing regardless of context. As a result, similar borrowers can receive different serviceability outcomes depending on how expenses are interpreted within a lender’s assessment model.

Interest Rate Buffers

Lenders apply buffers above current interest rates.

This means:

• repayments are tested at materially higher rates
• borrowing capacity reduces as rates rise
• capacity does not automatically rebound when rates fall

Buffers are structural safety mechanisms.

Why Borrowing Capacity Often Feels “Capped”

Borrowers are often surprised when:

• additional income does not increase capacity
• rental growth is ignored
• debt recycling strategies do not help serviceability

This occurs because the system prioritises risk containment, not optimisation.

How This Framework Interacts With Other Pillars

Income & Serviceability interacts closely with:

• Equity & Deposit Framework (risk layering)
• Security Acceptability (income reliance vs asset quality)
• Entity Structuring (how income is distributed or retained)

Weakness in one area tightens all others.

Detailed Explanations in This Pillar

The Income & Serviceability framework contains several core assessment mechanics that are explained in detail below:

• How lenders assess income
• How borrowing capacity is calculated
• Why borrowing capacity caps out
• How living expenses are assessed
• How existing debts affect servicing

These pages explain the individual components that combine to determine overall serviceability outcomes.

What This Page Is — and Is Not

This page explains how income and liabilities are assessed within the Australian lending system.

It does not:

• calculate borrowing capacity
• recommend loan products
• provide personal advice

Those outcomes depend on individual circumstances and lender policy.