What do mortgage lenders look for in bank statements?

When you apply for a mortgage, banks and mortgage lenders are typically looking for what is sometimes called the Four Cs, which are your:

1. Capacity: Your ability to repay a loan.
2. Character: Your credit history and financial responsibility.
3. Collateral: Assets the bank can sell to get their money back if you don’t pay (for mortgages, this is typically the property being purchased).
4. Capital: Any other assets, such as a savings that you could use to repay the debt.

You may be curious as to why mortgage lenders specifically look at your bank statements. Put simply, this is because your bank statement helps to prove:

• Your income
• Your necessary expenses
• Your discretionary expenses
• Your ability to save
• Your existing debts

Lenders want to take stock of how you spend your money to calculate if you can afford mortgage repayments. Your past financial behaviour is a key component of a lender’s eligibility criteria, as the bank or lender must legally determine that you will be able to pay your mortgage instalments on time, even if interest rates rise.

Typically, when you apply for a home loan you will need to provide around three months of bank statements. Here's what a lender may pay close attention to when analysing statements:

Your bank statements help establish that you are regularly earning an income. Lenders will not approve mortgages for borrowers who are not employed, or that do not meet minimum income requirements. The lender will look at your bank statements to assess the frequency of your income and the net amount you are paid. Using this information and more, this lender can determine your debt-to-income (DTI) ratio, which helps to ensure that you can afford to make regular mortgage repayments with minimal risk of default.

A high income may not always be as important to a mortgage lender as a consistent income. Borrowers who job-hop or have just started in a new position may be at a disadvantage compared to borrowers that have held their position for some time.  Self-employed borrowers or contractors may need to provide extra proof of income, as their income may not be as consistent as borrowers earning a salary from an employer. As well as bank statements, this could include tax information and other business documents to determine how much you earn.

Mortgage lenders look at your spending as part of a home loan application. Your lender will categorise the debits and payments made from your bank accounts to create a picture of how much you spend each month. This helps the lender calculate if you will have sufficient funds to meet your mortgage repayments after taking the home loan.

 These categories may differ for each lender, but generally refer to:

• Rent
• Groceries
• Utilities, like electricity and gas bills
• Insurance
• Liabilities, like car loan or credit card payments. 
• Entertainment, like online shopping, dinners out and more. 

Lenders use your bank statements to confirm that you will be able to pay for existing essentials such as insurance, or kids’ education fees, after you take out the mortgage. They will also check for any other liabilities that you may not have mentioned to them, such as scheduled direct debits from your account. 

Your household expenses may be compared to the HEMS or Household Expenditure Measure, which is based on the Australian Bureau of Statistics Household Expenditure Survey. This helps the lender work out if you are spending more or less than average for a household with the same number of adults and children on similar income levels.

If your account balance frequently hits zero, gets overdrawn almost every month just before your next salary is due, or if your entertainment expenses are high, lenders may determine that you will not be able to meet mortgage repayments comfortably. 

This is why experts recommend cutting down on discretionary spending, such as takeaway food and shopping sprees, in the months leading up to your home loan application. This will reduce the spending categorised as entertainment in your bank statement, giving you more room in your budget for mortgage repayments. 

Keep in mind that there may be exceptions to consider as part of the application. For example, a Fly In Fly Out (FIFO) worker may be only home half the time, and may have many of their household expenses covered while they’re away at work.

Mortgage lenders typically favour borrowers that pose the lowest risk of default, and they look for evidence of fiscal responsibility in your bank statements. This may include calculating how much you save. In fact, many home loan providers want applicants to demonstrate genuine savings that are at least three months old before they will approve borrowers for a loan.  

Genuine savings refer to money you have saved up gradually over time, as opposed to a work bonus, a tax refund, inheritance or even a lump sum payment from family right before you apply for the loan.

Most lenders will accept all or some of the following as genuine savings:

• Savings held or accumulated in your bank account for a minimum of three months;
• Term deposits held for three months or more;
• Gifted money held in your account for more than three months;
• Shares or managed funds you have held for more than three months.

On the flip side, lenders may also look at your bank statements to see if there are dishonoured payments or late charges on the credit card or utility bills. Charges like these may raise a red flag in the lender’s mind that you struggle to meet your expenses and may not be financially responsible enough for mortgage approval.

A mortgage lender will use your bank statements to confirm that you’ve saved a sizeable enough deposit for home loan approval. 

Banks generally prefer borrowers capable of putting down a deposit of 20% or more of the value of the house, providing a Loan to Value Ratio (LVR) of 80%. Whether you are putting down exactly that amount as your deposit, or more or less, your lender will likely want to see it in your bank account before approving the loan.

Keep in mind that providing a deposit of more than 20% of a property’s value could help you to qualify for home loans with lower interest rates. On the other hand, it’s still possible to get a home loan with a deposit of 10% or 5%, though the eligibility criteria may be stricter, and the bank may take out a Lenders Mortgage Insurance (LMI) policy that you’ll be expected to pay for – the lower your deposit, the higher the potential LMI cost.

Sometimes if you’ve applied for a home loan but received a rejection from the lender, your bank statements and other documents may have indicated that you are not an ideal home loan applicant. 

So, what can you do if your bank statements don’t meet the lender’s criteria? Before you apply for your next home loan, it’s good practice to set up habits now that show lenders you’re a responsible borrower. 

Some of these responsible practices may include:

1. Paying off your outstanding debts, including student loans (HECS/HELP).
2. Growing your genuine savings, or having lump sums like cash gifts or inheritances sit in your bank account for at least three months.
3. Cut your discretionary spending in the lead up to your application.
4. Paying your bills on time - setting up direct debits can help to avoid late fees.
5. Paying off any outstanding debts and lowering the limit or cancelling any credit cards you hold.

If you need more help applying for a home loan, you could consider contacting an expert. A mortgage broker may be able to help you find a mortgage with eligibility criteria that matches your financial situation, and also help manage the application process on your behalf.