When you apply for a mortgage, your mortgage broker is required to make reasonable enquiries about your living expenses. It dosen't matter if its your first home, investment purchase, or refinancing the same rules will apply.
In the current lending climate more increased scrutiny of these expenses in now required. The primary reason is that banks and lenders have to ensure that you can pay for your new home loan.
It’s a direct response to authorities such as APRA (Australian Prudential Regulation Authority) who are increasing their pressure to ensure that there is a prudent approach and robust lending standards under their “responsible lending” guidelines.
They are now regularly warning about the risk for property buyers who take on too much debt and their ability to meet their commitments should their personal circumstances change, such as losing a job, or if economic conditions cause a sharp property market correction.
If you are applying for a mortgage, this has translated to tighter lending rules and reduced borrowing capabilities in multiple instances. For example, banks are changing their loan serviceability calculators to add risk buffers when assessing loan repayments and there is a heightened focus on the living expense estimates that borrower’s state in their applications.
In many cases when are asked about living expenses there is a tendency to underestimate the bare necessaries and forget about discretionary expenses.
As a guide these are the category of living expenses that an applicant is expected to account for.
The need for providing an estimate of your living expenses is in response to new guidelines that require lenders to factor in different minimum living expense benchmarks for applicants based on different family sizes, income levels & postcode locations.
The basis for these living expense benchmarks in Australia is the Household Expenditure Measure (HEM), which is the same method used by the Australian Bureau of Statistics (ABS) when determining their inflation estimates.
Whilst most borrowers have a general idea of the overall weekly or monthly living expense budget, they do struggle to provide an accurate breakdown of these expenses into individual categories. A good online Budget Planner calculator for this purpose is provided by ASIC (Australian Securities & Investment Commission) on their MoneySmart website (https://www.moneysmart.gov.au/), and borrowers are encouraged to use this tool to calculate their own living expense estimates prior to applying for a home loan.
From the bank’s perspective, they will compare your declared living expenses figure to the relevant HEM calculation, and the higher of these two figures is then used as the basis to determine how much you can afford to borrow and comfortably repay.
Finally, a word of caution for borrowers who are researching their home loan options on the internet. When using “How Much Can I Borrow” calculators, it is important to remember that these are generic calculators do not take your individual circumstances into account. As a result, your borrowing capacity can be significantly different to what these calculators indicate.