How Banks Actually Assess Your Income for a Home Loan
When the bank tells you how much you can borrow, the number comes from a servicing model fed by your "assessable income". The catch is that assessable income is not the same as gross salary. Different income types are discounted, capped, or rejected entirely depending on how stable the bank considers them. Understanding the rules saves you arguing with the wrong bank.
Base salary
Permanent, full-time salary is the gold standard. Banks generally count 100 percent of your gross base salary if you have been in your role for three months or longer. Probationary periods are usually fine if the contract is permanent.
Overtime
Counted at a discount — typically 60 to 80 percent of the average over the last 6 to 12 months. Banks will not count overtime that has appeared only sporadically or has clearly tapered off.
Commission
Most banks average commission over the most recent 12 to 24 months and count between 60 and 80 percent of that average. A commission-heavy income (say 60 percent base, 40 percent commission) almost always loses some borrowing capacity compared to a fully-salaried equivalent.
Bonuses
Treated similarly to commission — averaged, discounted, and only counted if there is a track record. A single-year bonus is rarely counted in full; two or more years of consistent bonuses are counted at 70 to 80 percent.
Contract income
Fixed-term contractors face more scrutiny. Banks like to see:
- At least 12 months of contracting history
- The current contract still has 6 to 12 months left
- A pattern of contract renewals or back-to-back contracts
If you tick those boxes, banks typically count contract income at 80 to 100 percent. Short contracts or first-time contractors may be limited to a smaller subset of lenders or specific contractor programmes.
Self-employed income
Most banks want two full years of company or IR3 returns, with the assessable income being the lower of the two years (or sometimes an average, depending on trend). Add-backs are allowed for non-cash items like depreciation and one-off costs. Self-employed assessments require an experienced adviser; the structural questions (Look-Through Company, sole trader, partnership) materially change the result.
Rental income
For existing investment property, banks generally count 75 percent of gross rent — the discount covers vacancy and outgoings. For boarder income (a flatmate paying rent to your owner-occupied home), counting rules are bank-specific; some count it fully, others not at all.
Government and benefit income
Working for Families tax credits, accommodation supplement, and most other government benefits can be counted, often in full if there are dependents and the benefit is ongoing. Sole-parent benefits, NZ Super, and other long-term payments can also be counted but with bank-specific rules.
What the bank does not count
The big ones:
- Cash work without paperwork
- Income from a business with under 12 months of trading
- Income from a second job not declared on IR3
- Future income from a job offer that has not yet started
What this means for your application
Two borrowers with the same gross income on paper can have wildly different assessable incomes once the bank is finished applying its discounts. Understanding this before you apply is critical — it tells you which lender to approach and what realistic borrowing capacity to plan around.
Talk to SMS Loans before you start house hunting. We will run the assessable income calculations for the lenders that suit your income mix, and tell you which bank is most likely to give you the strongest result.