The way Lenders assess your living expenses is constantly changing with the increasing regulations for responsible lending. Being prepared for a thorough look into your living expenses can be key to successfully obtaining a loan approval in 2020. We break down how and why Lenders assess your living expenses, and give you a guide to start preparing for your home loan application.
The identification and declaration of living expenses has become one of the biggest hurdles to overcome in home loan assessments since last year’s Royal Commission. Lenders are now assessing living expenses more prudently, with most utilising the Household Expenditure Measure (HEM) in combination with the assessment of transaction spending accounts to conservatively verify the breakdown of discretionary and non-discretionary expenses that an applicant and their broker have declared.
Household Expenditure Measure (HEM)
The Household Expenditure Measure, more commonly known as HEMs, is a living expenses figure that is based on data sourced from the Australian Bureau of Statistics. The calculation is dependent on characteristics such as your relationship and family status, location, income, and age, amongst other categories. This figure can change from lender to lender, which can cause large variances in the calculation of an applicant’s borrowing capacity amongst competing Lenders.
In the past HEMs were one of the most commonly used assessments of living expenses amongst Lenders, but the Royal Commission has since established that HEM figures were not an accurate portrayal of most people’s living expenses as some expenses were not always represented; such as private school fees, private health insurance and travel. This has placed more emphasis on extra verification of living expenses through the assessment of transaction and savings accounts, the categorised declaration of discretionary and non-discretionary living expenses, thorough client/broker conversations, and the more accurate estimation of post-purchase costs.
Living Expenses Categories
Lenders categorise living expenses differently, but the following can be used as a guide to start thinking about your spending habits more accurately, and to cross-check your accounts in preparation for your home loan application:
- Owner Occupied Property Expenses: Council Rates, electricity, gas, water, strata fees, land tax, property maintenance, property repairs, gardening etc.
- Investment Property Expenses: Property management fees, council rates, electricity, strata fees, land tax, property maintenance, property repairs, gardening, utilities (if not payable by tenant) etc.
- Insurances: Home & contents, vehicle, health, life, income protection, landlord, pets etc.
- Food & Groceries: weekly groceries such as fruit, vegetable, meat and general groceries, household items, take away food etc
- Transport & Auto: Fuel, registration, public transport, repairs, maintenance, parking, tolls etc.
- Clothing & Personal Care: Clothing, shoes, hygiene, hair & beauty etc.
- Medical, Health & Fitness: Gym, personal training, doctors, dentist, physiotherapy, massages, medicine, eye care, glasses etc.
- Communications: Phone, internet, Foxtel, subscription steaming such as Netflix & Spotify etc.
- Entertainment, Recreation & Travel: Restaurants, movies, holidays & travel, sports, gaming, music, events, gambling, alcohol, cigarettes, electronics etc.
- Education: School / university fees, books, stationary, materials, courses, higher education etc.
- Children: Child or day care, sports, music, tuition, babysitters, child support etc.
- Pets: Food, vet, registration, enclosures, pet school etc.
- Other Considerations: Gifts, union fees, fines, regular donations etc.
Simply stating your post settlement living expenses budget is likely not going to cut it these days, so it is integral to identify your actual spending habits, and where you could tighten up the budget before you apply for a home loan.
A Bernie Lewis Home Loans Mortgage Broker can assist with preparing you to obtain a successful loan approval decision that is sustainable for the long-term. To discuss your living expenses position and loan requirements; simply call 8300 8300 or chat with us online today!
*The information provided in this article is general in nature and does not take into account your personal circumstances. Since everyone's personal situation is different, this article should not be taken as advice. The figures used in this article are to be used as a guide only. Depending on your personal circumstances, these numbers may vary. We recommend you seek individual advice with a mortgage broker.