u/Linton-Finance

When applying for a home loan, the bank compares the living expenses you declare against its own minimum benchmark, known as HEM.

The bank will use their benchmark number or your expenses whichever of the two is higher, so if you are below their benchmark this can have a material impact.

For a single applicant with no kids earning $100k, the lowest lender benchmark is $1,718 per month and the highest was $2,255.

For a couple with one child earning $125k each, it ranges from $4,532 to $5,391 per month.

In a completely vanilla scenario, the lender using the lowest living expense figure also provided the highest borrowing capacity.

Just another reason borrowing capacity can vary so much from one bank to another.

One of the more interesting charts from Cotality this month.

Over the last three months, Sydney’s top 25% fell 5.2% compared with just 1.4% at the bottom end.

Melbourne is almost identical. The top end fell 4.6% while the bottom fell 1.2%.

This is pretty consistent with what I’m seeing. First home buyer price points are still competitive, but once you move into the higher end there are fewer buyers, more properties sitting around and far more room to negotiate.

If you’re upgrading, you might take a hit selling your current place, but the discount available on the next property could be much larger.

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For investors, interest-only can make sense when the goal is to direct more cash towards non-deductible home loan debt, retain funds in an offset or improve cash flow for another purchase.

But it comes with a few catches.

The rate is generally higher and, as the name suggests, you’re making no contribution towards the principal.

Applying for a new interest-only loan can also reduce your borrowing capacity because the bank assesses the debt over the shorter principal repayment period.

Interestingly, the opposite can apply when you already have interest-only debt and approach certain non-bank lenders.

Some non-banks assess existing debts using the actual interest-only repayment rather than a buffered principal-and-interest repayment. For investors with multiple loans, that policy can have a major impact on borrowing capacity.

Two policy changes caught my attention this past week.

AMP has launched a 40-year investment loan with up to 10 years interest only.

This matters because a standard 30-year loan with five years interest only is generally assessed on the principal being repaid over the remaining 25 years. Those higher repayments can reduce borrowing capacity, even though the investor may intend to extend the interest-only period later.

AMP’s structure leaves 30 years to repay the principal after the interest-only period. For some investors, this means directing more cash towards their non-deductible PPOR debt while keeping the investment loan interest only for longer.

Westpac has also increased the amount of rental income it will accept for servicing to 95%. Most banks discount rent to allow for vacancies and other risks, so accepting more can materially improve investor borrowing capacity.

Investor demand has dropped, so banks are changing policy to compete for what’s left.

One of the key things I try to explain to clients early in their home-buying journey is that the bank’s maximum borrowing capacity should not automatically become their budget.

If you’re buying a home to live in, my version of the optimal position is to borrow less than 80% of your maximum capacity and still have six months of living expenses plus six months of mortgage repayments sitting in an offset after settlement.

Buying at this level should leave you with enough monthly surplus to build the offset quickly, handle unexpected costs and make a meaningful dent in the loan.

Then overlay where your income could be in five years. If your income increases without your lifestyle expanding at the same rate, turning a 30-year mortgage into something closer to 10-15 years can become achievable.

This won’t be realistic for everyone. But if you can find the right property within that borrowing limit, you’ll be putting yourself in an incredibly strong position.

Liberty Financial has become the first non-bank lender to join the government’s 5% Deposit Scheme.

This is a genuinely useful addition. Non-bank lenders can offer more flexibility around income types, credit history, property types and borrowing capacity. It could create a pathway for buyers who qualify for the scheme but don’t fit the policy of a mainstream bank.

That flexibility will generally come with a higher interest rate, so Liberty won’t be the cheapest option for everyone.

But at least eligible buyers who would otherwise be told no may now have another way into the market.

Some lenders will assess your return-to-work income if you can confirm your return date, hours and salary, and have enough savings to cover repayments and living expenses during any unpaid leave period.

The common sense is built into the policy. If you have a clear return-to-work plan and enough money set aside to bridge the income gap, being on parental leave doesn’t automatically mean the loan should be declined.

This comes up more than you’d think.

You’re spending more time at home, the house suddenly feels much smaller, and that extra bedroom or second living area starts looking far more important.

ASIC has just revealed that banks paid more than $55 million in compensation after mortgage offset accounts failed to work as promised.

The concerning part is how difficult this can be for borrowers to notice.

ASIC reviewed 204,000 home loans across eight banks and found failures involving how offsets were opened, linked and managed.

This was between 1 September 2023 and 31 August 2025

Worth checking your banking app and statement today. Make sure the offset is linked to the correct loan split and the balance is actually reducing the interest being charged.

Infographic from the ASIC article released today

The next RBA decision is on Tuesday 11 August.

On 17 July, the ASX rate tracker was pricing a 16% chance of another 0.25% increase.

By 24 July, that had jumped to 43%.

The main catalyst was stronger-than-expected employment data.

Australia added 76,300 jobs in June, compared with expectations of around 15,000. Unemployment held at 4.4% as more people entered the workforce.

A strong labour market gives the RBA more room to raise rates if inflation remains stubborn, while higher oil and energy costs have added further inflation risk.

A hold is still marginally more likely, but another increase is no longer an outside chance.

The next major piece of data is June inflation which comes out tomorrow, which will likely determine whether those odds rise further or fall back.

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An offset acts like a normal transaction account. Salary goes in, you spend from it and can even have multiple offsets attached to make saving simpler.

The difference is every dollar sitting there reduces the portion of your loan being charged interest.

Your repayments don’t change. But less interest is charged, so more of each repayment goes straight to paying down the loan, meaning it gets paid off sooner.

I’ve updated my offset calculator so you can now model regular monthly savings as well as your starting balance.

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Right now In many parts of the market, buyers have more choice, properties are sitting longer and agents are having to work considerably harder to get deals done.

Many real estate agents have spent the past few years negotiating from a position of strength.

Thirty people at the open home with offers flying around, buyers worried that somebody else would pay more.

The most powerful thing you can have in any negotiation is options.

When you are prepared to walk away because there are three other suitable properties available, the agent can feel it. When you have mentally decided this is your dream home, they can feel that too.

The other levers are:

• Find out why the vendor is selling and shape your offer around it
• Have your finance ready and make your offer look safe
• Anchor your price to recent comparable sales

The buyer who is willing to walk away usually has far more leverage than the buyer trying to convince everyone they have found their forever home.

From a tax perspective, the label on the loan does not determine whether the interest is deductible.

The ATO looks at what the borrowed money was used for. (purpose driven)

If the loan was used to purchase the property and it is now producing rental income, the interest may generally be deductible even if the bank still calls it an owner-occupier loan.

If you’re still receiving the cheaper owner-occupier rate, great.

The bank may require you to notify them and could reprice the loan under its terms and conditions. But that is a bank issue, not what determines the tax treatment.

What does matter is redrawing or mixing personal and investment spending through the loan. That can affect deductibility and make the accounting messy very quickly.

I had a client come to me this week wanting to refinance and release equity for a pool, hopefully in time for summer.

His existing bank said it was not possible because their valuation put the total lending just above 80% LVR.

We tested the property with a few other lenders and, surprise surprise, found two banks that valued it high enough to bring the lending closer to 70% LVR.

The strategy with these refinances is then to create 2 loan splits upon refinancing and keep the cash-out in an offset account so no interest is being calculated until the contractors need paying.

It also keeps the renovation funds separate, making it much easier to track what has actually been spent.

I’ve put together an updated guide for first home buyers after the feedback on the 2025 version was outstanding.

It breaks down the current government schemes, how banks calculate borrowing power, the real upfront costs, pre-approval, the buying process, common loan terms and the mistakes that can cost buyers money.

No personal details are required. It’s simply a free PDF download.

Hopefully it helps a few people avoid learning some of this the expensive way.

Link below.

A misconception that comes up a lot with first home buyers is credit cards that are open but barely used. People assume if the balance is small (or even $0) it won’t matter when applying for a home loan, but banks don’t assess it that way.

Lenders assume that the full limit could be used at any time.

Because of that, credit cards are assessed based on the limit, not the balance. A simple rule of thumb is that credit cards reduce borrowing capacity by roughly 5× the limit. So a $10k credit card can reduce borrowing power by about $50k.

The good news is many lenders will allow the limit to be reduced or the card closed as a condition of approval, which can restore that borrowing power before settlement.

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Most people know that buying with less than a 20% deposit usually means paying lenders mortgage insurance.

What a lot of buyers don’t realise is that LMI does not protect them. It protects the bank.

If you borrow $1m with a 10% deposit, you could be looking at roughly $20k to $22k in LMI

Higher LVR loans are often priced worse, sometimes by 0.25% to 1.00%, so the cost is not just the insurance premium. It can be a higher repayment every month until your property value increases or the loan is paid down.

The First Home Guarantee has been one of the best known ways around this. Eligible first home buyers can buy with 5% deposit and no LMI, provided they meet the scheme rules and buy under the relevant price cap and access competitive rates.

But it is not the only pathway.

There are lenders offering no-LMI options for certain borrowers, including:

• 90% no LMI for some owner occupiers and investors (no occupation restrictions with Ubank)
• 90% no LMI for education, essential workers and frontline roles
• 95% no LMI for Medico
• 90% no LMI for accountants, lawyers and engineers
• 90% to 95% no LMI for some IT professionals
• 85% no LMI for some sportspeople, entertainers and coaches

The catch is that every lender has different rules.

Some have income caps, loan size caps, occupation requirements, association membership requirements or property restrictions.

Using equity for a renovation is easier than most people realise, although it does require a new loan application.

The process is similar to a normal refinance. A broker compares lender options, orders valuations and recommends a suitable structure based on how much you need.

Many lenders allow cash out up to 80% of the property’s value. If you are close to that limit, the choice of bank can make a significant difference because valuations can vary by 10% to 20%.

I had an example this week where the existing bank valued a property at $1 million. Bankwest came back at $1.2 million and Westpac at $1.125 million.

That difference can completely change how much equity is available.

The usual structure is to refinance the existing home loan, ideally onto a more competitive bank, and create a separate loan split for the renovation funds.

For non-structural renovations, many lenders do not require building quotes or progress payments. The funds can be released into an offset account and accessed as invoices come in.

With July approaching, this is when people start planning pools for summer, patios, bathrooms, kitchens and other upgrades.

Before using your savings or committing to the work, it is worth checking what your property is worth across a few lenders and how much equity you can actually access.