Why Was My Home Loan Application Rejected?

Short answer: A home loan is usually declined because of your credit file, because your income does not cover the loan once the lender has tested it at a higher interest rate, or because your circumstances do not fit that particular lender’s policy. Most of these causes can be identified, and many can be fixed, but you need to find out which one applies to you first.

This is general information only and not financial advice. Lender policies differ, so check the details with your own lender or a licensed broker.

Start by asking the lender why

Moneysmart says you should ask the lender why you were rejected, and that if the rejection relates to your credit report, they have to tell you (Moneysmart, loan rejection). In my experience people often walk away with a vague “borrowing capacity” message and never ask the follow-up question. Ask it in writing if you can, because the answer decides what you fix.

The three main reasons applications are declined

Moneysmart groups the causes into credit report issues (late or missed repayments, unpaid debts, many recent credit applications, defaults) and current finances (income too low for the loan amount, high expenses, other debts). It also notes that lenders must decline a loan if their assessment shows it could cause hardship, even if you feel confident about repaying (Moneysmart).

• Credit file: repayment history, defaults and the number of recent applications.
• Serviceability: whether your income covers the loan, your living costs and your other debts, tested at a higher rate.
• Policy fit: how a particular lender treats your type of income, deposit, property or loan size. Policies differ between lenders.

How serviceability works

Lenders do not test your repayments at today’s rate. APRA, the prudential regulator, expects lenders to apply a serviceability buffer of at least 3 percentage points over the loan rate, and it has confirmed the buffer remains at 3 percentage points (APRA, November 2024; APRA, 2021 letter).

Illustrative example (my own arithmetic, not a quote): a $500,000 loan over 30 years at 6.00% has repayments of about $2,998 a month. Tested at 9.00% (6.00% plus the 3-point buffer), the same loan needs about $4,023 a month. That is roughly $1,025 more per month that your income has to absorb on paper, before living costs and other debts are counted. Rates here are chosen only to show the arithmetic.

Your living expenses are also assessed. How lenders do this varies, and many use a benchmark such as the Household Expenditure Measure (HEM) as a floor when your declared spending looks low. Check how your lender approaches it.

Existing debts and credit limits

Every ongoing commitment reduces what you can borrow. Moneysmart’s description of a credit report notes that it lists credit products held in the last two years, including credit limits (Moneysmart, credit scores and credit reports). In my experience lenders typically assess a credit card on its limit rather than what you currently owe, so an unused $15,000 limit can still count against you. Whether a lender does this, and how it treats car loans with a short time left, differs between lenders.

Credit file habits worth checking before you apply

Your credit file records applications as well as repayments. Moneysmart says each credit application is recorded on your report and too many in a short time can lower your score. It also says each buy now, pay later application triggers a credit check, and that BNPL arrangements and late fees may show on your report (Moneysmart, BNPL).

• Hold off on new credit applications, including rewards cards and BNPL sign-ups, for 6-12 months before you apply. That window is my own rule of thumb, not a regulated period.
• Check your own credit report first. You can get a free copy every three months, and more often if you have recently been rejected for credit (Moneysmart).
• Do any tidying up, such as closing unused cards or accounts, well before applying. In my experience closing accounts also shows on your file, so do not leave it until the week before.
• Do not pay a credit repair company to fix errors you can dispute yourself. Moneysmart warns they may charge high fees for things you can do for free.

Perfect repayments are only part of the picture. Habits that feel harmless, like a rewards card here and a BNPL account there, can shape how a lender sees you months later.

What to do next

• Ask the lender, in writing, for the specific reason for the decline.
• Get your free credit reports and check every listing is yours and correct.
• List every card limit, car loan, BNPL account and personal loan, and decide which can be paid out or reduced.
• Run your own numbers at 3 points above the loan rate to see whether the repayments are realistic.
• Pause new applications until the issue is fixed, then approach a lender whose policy suits your situation.

Related Reading

• Lending Glossary
• How an RBA rate move changes your repayments
• Should You Refinance? The Simple Maths That Actually Answers It

Written by Michael Wignall, who’s spent 30+ years in banking and home lending across the ACT, Illawarra, and Riverina regions of NSW.

More on this topic is collected in the Finance Strategies for Australians hub.

Prefer LinkedIn? I post there first — follow along for the same insights as they go up.

Written by Michael Wignall, Lending Area Manager with 30+ years in banking and home lending across the ACT, Illawarra, and Riverina. Got a question or an idea for a post? Get in touch.