Good Credit Score but Home Loan Rejected: Why?

A good credit score can still lead to a home loan knockback because the score and the lender’s affordability test measure different things. Your score reflects your credit history, while serviceability asks whether your income covers the new loan, your existing debts and your living expenses.

This is general information only, not financial or credit advice. Lending policies differ between lenders, so check with yours.

What a credit score actually measures

According to Moneysmart, your credit score is calculated from what is in your credit report, including your borrowing levels, the number of credit applications you have made and whether you pay on time. Income and living costs are not part of that picture. For how a lender reads the credit file behind the score, see What Your Credit Score Actually Does to a Home Loan Application.

In my experience, this is the part most people miss. A clean repayment history tells a lender you have been reliable. It does not tell them whether you can afford a bigger loan than the ones you have handled before.

How lenders test whether you can afford the loan

Lenders have to make reasonable inquiries about your finances and decline an application if their assessment shows the loan could cause hardship, as Moneysmart’s loan rejection guide explains. In practice, that assessment looks at four things:

• Your income, after tax and after any adjustments the lender applies to variable income such as overtime or bonuses.
• Your existing debts and commitments, including credit card limits, car loans and buy now pay later accounts.
• Your living expenses, covered in the next section.
• A buffer on the interest rate. APRA has stated the mortgage serviceability buffer remains at 3 percentage points, meaning lenders test whether you could still afford repayments at a rate 3 points above the loan’s actual rate.

Why living expenses can sink an otherwise strong file

Many lenders compare your declared expenses against a benchmark such as the Household Expenditure Measure (HEM). The benchmark is a floor, not a ceiling. In a 2018 case, ASIC said a lender breached responsible lending obligations by using the benchmark instead of having regard to customers’ declared living expenses, including where actual expenses were higher than the benchmark.

The practical effect is that if your real spending is higher than the benchmark for your household, the higher number matters. Bank statements often show more than people expect: dining out, subscriptions, travel, childcare and regular transfers all add up. How each lender reads and verifies statements differs, so two lenders can reach different numbers from the same account history.

Other reasons a loan is declined with a good score

• Borrowing more than your income supports. Moneysmart lists income that is too low for the amount, high expenses and existing debts as common rejection reasons.
• Unused credit card limits. Lenders generally count the limit, not the balance, so a high limit you never use can still reduce what you can borrow.
• Too many recent applications. Moneysmart notes that too many applications in a short time can lower your score and worry lenders.
• Deposit, property or policy issues. The property type, location or the size of your deposit may fall outside a particular lender’s policy.
• Income type. Casual, self-employed, commission and bonus income are treated differently across lenders.

An illustrative calculation of how the buffer works

Illustrative only: these figures are made up to show the arithmetic, not a real lender’s result. Suppose a loan carries an interest rate of 6.0 per cent. With a 3 percentage point buffer, the lender tests repayments at 6.0 + 3.0 = 9.0 per cent. On a $600,000 loan over 30 years, repayments at 6.0 per cent are about $3,597 a month, while at 9.0 per cent they are about $4,828 a month, a difference of roughly $1,230 a month. You would never pay the higher figure, but your surplus income has to cover it on paper. That is why the same household can have strong credit and still be assessed as unable to borrow the amount they want.

What to do next

• Ask the lender, or your broker, exactly why the application was declined. Moneysmart says lenders must tell you if the reason is your credit report.
• Get a free copy of your credit report and check for errors. Moneysmart says you can request one every three months.
• Go through three to six months of statements and total up your real monthly spending before you apply again.
• Cancel or reduce unused credit card limits and subscriptions that you do not need.
• Avoid lodging several applications at once, and consider a smaller loan amount or a different lender whose policy suits your situation.

Frequently Asked Questions

Can I be declined for a home loan with a good credit score?

Yes. A credit score reflects your borrowing and repayment history, while the lender separately tests whether your income covers the new loan, your existing debts and your living expenses, with a rate buffer on top.

What is the serviceability buffer?

APRA has stated the mortgage serviceability buffer remains at 3 percentage points, so lenders test whether you could still afford repayments at a rate 3 points above the loan’s actual rate.

Do unused credit card limits affect my borrowing power?

Generally yes. Lenders usually count the limit, not the balance, so a high limit you never use can still reduce what you can borrow.

Watch the video explainer

Prefer to watch? This video walks through the same four affordability checks and the buffer example.

Watch the video on YouTube

Related Reading

• What Your Credit Score Actually Does to a Home Loan Application
• Riverina Property: Why Regional Serviceability Rules Catch Buyers Out
• Self-Employed Home Loan in Australia: How It Works
• Why Was My Home Loan Application Rejected?
• Home Lending & Property Glossary
• 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.

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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.