How Will A Mortgage Lender Assess My Living Expenses?
Do you know how a mortgage lender will assess your living expenses as part of your application? Lenders have changed their assessment criteria in recent years. It is a process that is constantly evolving due to regulations for responsible lending. Get it right and it will actually increase your chances of approval.
How Will Lenders Calculate My Living Expenses in 2021?
There are a number of ways a lender will assess your expenses in 2021. If the lender determines that you cannot afford the loan amount, they will decline your application. In order to make a thorough assessment, the lender will use one, or a combination, of the following methods for its calculation:
- The Household Expenditure Method (HEM), which is based on your family size and income because it is considered unreasonable for someone to spend less than HEM each month.
- Ask you to self-assess your living expenses on your home loan application form.
- Review any bank account (cheque or savings accounts) or credit card statements they have access to in order to confirm your self assessment.
- Either accept or adjust your stated expenses to match your bank account history.
- Take the higher of the above living expense assessment methods to calculate your living expenses.
Let’s take a deeper look into these methods.
What is the Household Expenditure Method (HEM)?
The Household Expenditure Measure is a relatively new benchmark (it replaced the Henderson Poverty Line in 2012) that lenders use to determine your living expense allowances based on the size of your household – are you a single applicant? A couple? Do you have dependents?
Your household size combined with your income and whether you are living in a metro area or a non-metro area in your state will determine your allowable expense amount.
These allowable expense amounts are based on Australian Bureau of Statistics data, but can vary from lender to lender, which is why there can be variations in the calculation of your borrowing capacity from different lenders.
Household Expenditure Measure (HEM) Example
Some lenders will consider the average living expenses for a couple earning $63,000 to $85,000 to be $2,532 a month. That same couple with two children could be assessed as having living expenses as $3,101
Self-Assessment For Your Home Loan Application
Self-assessment is used in conjunction with HEM largely due to the Australian Securities and Investments Commission (ASIC) now requiring lenders to determine a borrower’s actual living expenses. During the 2019 Royal Commission, it was established that the HEM was not an accurate measure of most people’s real household expenditure.
You will be required to report expenditure items like:
- Clothing/personal care: clothing, shoes, cosmetics, hygiene and personal care products.
- Groceries: Weekly shop food and grocery items including cleaning products and toiletries.
- Transport: Public transport expenses, Uber trips, registration, petrol, servicing/repairs.
- Connections: Phone (landline), Internet, mobile, Streaming services, and other subscriptions.
- Medical expenses: Doctors (GPs), dental, optometry, holistic medicine and specialists that fall outside of bulk billing or what is covered by private health insurance.
- Recreation: Take-out meals, pet expenses, gifts, concerts, festivals, shows, etc.
- Owner occupied property: Utilities, rates and possible related costs including tax levies, body corporate and strata fees.
- Investment property: Utilities, rates, repairs and related costs including tax levies, body corporate and strata fees (for units).
- Insurances: Health, home, home and contents, life, income, car, motorcycle and boat, etc.
- Education: Public, private and all associated costs including uniforms and textbooks.
- Childcare: Childcare centre and preschool fees, nanny fees and after school home care etc.
- Any other regular, ongoing expenses
A Word of Caution of Self-Assessment
Incorrectly reporting your HEMS living expenses can affect your borrowing power due to overestimating or underestimating your expenses.
Avoid these common mistakes to improve your approval chances:
Debts should recorded separately under liabilities, not as regular, ongoing living expenses
Often people underestimate their living expenses because they are aware it can affect borrowing power, however, lenders have access to your bank statements as part of your application and can cross-check your spending habits
Be mindful not to include discretionary, one-off spending such as purchasing a car or a holiday trip in your living expenses – this will cause an overestimation
Ensure if you have ongoing expenses like your childrens’ private school fees to include them in your living expenses to ensure the lender has all the correct information
Rental expenses should not be included by a lender as they should only be assessing your living expenses that will continue once you have a mortgage, however, some lenders sometimes lump in all expenses.
Discuss any concerns with us to make sure your application is a complete and accurate self-assessment.
Reviewing Banks Accounts and Account Statements
If you bank with the lender, then their review will be an easy one with full access to your accounts, however, if you bank elsewhere you will need to provide statements for certain periods. The lender will look for regular debits from your account(s) that were not disclosed in your application.
A word of warning: If you are self-employed, lenders will often see your business expenses and include them as personal expenses. We can assist you with having the right evidence to ensure your living expenses are accurately represented.
What else do I need to know to get the best chance of approval?
- Accidentally declaring you spend more can mean a declined home loan
We can help you ensure you get your expenses right with our resources as part of your application. Careful consideration and not rushing your application will give you the best chance of accurate reporting.
If you get a declined application and you suspect you have declared too much spending, we can liaise with the lender on your behalf with evidence that expenses are no longer ongoing. Or, we can help apply to a different lender who we know will be less stringent in their approach to living expense calculations.
- If you are married or in a de facto relationship, this can still affect borrowing power, even if your partner is not on the loan
Lenders will assume your spouse is financially dependent on you so you will need to include their living expenses on your application. However, we may be able to help you prove your spouse isn’t financially dependent on you so you can be assessed as having “single” living expenses.
- Debts with other people could be assessed as 100% in your name
Joint debts with people not on the loan application can be classed as only in your name by some lenders. However, there are some lenders available to you who will assess you at 50%, known as a common debt reducer home loan.
If all this has left you a little confused about how will a mortgage lender assess your living expenses, it is because it is confusing. Variables between different lenders can mean headaches for applicants. Talk to us today and we can ensure you get the best chance at approval for your loan first time.