Employment Requirements

Of all the criteria banks used to assess a person's suitability for a loan, income is a central plank in their policy. After all, it is incumbent upon banks to act responsibly when granting credit and one of the key criteria is to establish whether or not a person can afford the repayments associate with a loan.

But it goes much further than this. A bank has to establish beyond reasonable doubt that a person will be able to afford a loan, not just in the immediate future, but in the long term as well. For this reason, a bank will often assume that the loan requirements will be more onerous in the future and they will test a person's capacity against this increased burden to see if they qualify.

PAYG applicants.

For a PAYG applicant, the yearly salary is used as the benchmark. If overtime is regularly worked it will also be added to the income but the applicant has to prove he or she has received over time on a regular basis for at least 12 months. Similarly, shift allowances will be taken into account but it must be shown that these allowances have been paid for at least 12 month period on a regular basis.

Centrelink benefits will be accepted as income but deductions will be made in respect of payments for children who will cease to be eligible for the benefits within the next three years. In other words, for older children, around 15 years of age, benefits will not be included in the assessment.

Self-employed applicants.

The bank will require completed tax returns for the last two financial years for the company or business and also the individuals included on the loan application.

Some lenders will average the income over the last two years, or in some cases they will only accept the lower income of the two years especially if the most recent year is lower than previous years.

Where the income has increased over the two years, some lenders will only allow the lower of the two years plus a factor of 20% or 30%, depending on the circumstances. So for example, a borrower who has self-employed income of $45,000 in year one and $75,000 in year two, the bank will adopt a figure of $45,000 multiplied by a factor of 1.2 or 1.3.

Self-employed applicants will also benefit from the addition of add backs. This occurs where unusual or non-recurring expenditure occurs in one year. The applicant will need to prove the non-recurring nature of the expense so that it can be added to income for assessment purposes.

Depreciation costs can also be added to income under certain circumstances, but banks vary in this practice from lender to lender and on a case-by-case basis only.

Once the bank has established a yearly income figure it then goes on to assess existing commitments. These commitments include loans that still have to be paid on a monthly basis, credit cards and any loans for which the applicant is a guarantor. HECS obligations are also factored in as an ongoing yearly expense, and the bank will also add in a reasonable calculation for living expenses.

Living expenses are meant to include things like food, insurance, utility payments, clothing costs, in short everything that can be associated with living life on a day-to-day basis. The figures used to this calculation are at the discretion of each bank. Some adopt the Henderson Poverty Line calculation which is an official publication of a figure determined by examination of data provided by the Bureau of Statistics. Others use their own internally developed measures.

The bank then calculates how much the monthly loan repayment will be for the loan and then recalculates this figure as if the interest rate was 1.5% or 2% higher. This process is called shading.

Then, the total of all expenses, including the shaded amount for the new loan, is deducted from the income to determine how much cash remains to be committed to the loan which has been applied for.

Here is an example.

Total income $55,000 gross per annum. This is equivalent to $3677 net per month.

Existing loan commitments $400 per month.

Proposed new loan of $200,000 over 30 years at 7.2% interest. Monthly required repayment $1349.48.

Living expenses $1180 per month.

Shaded monthly repayment at 9.2% interest would require a monthly repayment of $1625.65.

Therefore, the total commitments required would be $400 plus $1625.65 plus living expenses of $1180.

Total monthly expenditure $3205.65.

Total monthly income $3677.

This means the applicant has a surplus of $471.35 per month and, provided all other criteria are met, the loan will be approved.

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