We don’t just ask how much money you spend on coffee per month to make ourselves feel better about how much we spend, although secretly sometimes it does make us feel better.
The banks are asking more and more questions about our client’s spending habits, if they are taking it seriously, then so are we.
Any good mortgage broker will ask you to break down how you spend your money each month (if they don’t, ask yourself if they are looking after your best interests), they should ask this because the banks have always taken living expenses into account when calculating your ability to service a loan, along with a number of other factors. However, over the last few months we have seen a significant shift in how the banks deal with living expenses. In the past, a simple living expenses estimate would suffice, but now more and more lenders are asking for a detailed breakdown of your monthly spending, from haircuts to health insurance, along with three months worth of transactions statements so they can check your current and ongoing commitments for themselves. They are looking to see if what has been declared is accurate for how much you spend on groceries and fuel and if your statements show a regular fee such as childcare or school fees especially if there has been no mention of children on your application.
Living expenses are important to lenders because under the National Consumer Credit Protection Act, they must allow for how much you can afford in mortgage repayments, so the money you spend on fuel, food and that $4 a day habit at your favourite Sunshine Coast Cafe all need to be factored in. Living expenses are different for every family and when we help clients budget we look closely at this, to see if there is anywhere you can make some savings. That is why we take the time to get a really good monthly breakdown for you. Often clients are shocked at how much they spend and it’s a really good step towards making some changes and sometimes some moments of “your hair costs you HOW much a month” from an oblivious partner. A really simple and free tool we recommend clients use is the ASIC money smart calculator, which you can either sign up to or just download their spreadsheet and enter your expenses, you can have a look at it here – expenses planner.
So just how do the banks make their assumptions on what a family of four should be paying in living expenses? There are two methods, HEM or the Household Expenditure Method as its called and HPI the Henderson Poverty Index. HEM is more commonly used and looks at over 600 items calculated from an Australian Bureau of Statistics survey. It then calculates at the median spend on basic needs such as food, utilities, transport, communications and kids etc. Plus it looks at the 25th percentile spend on discretionary items such as alcohol, eating out and childcare and arrives at a figure. The HPI method is not used as much now, it was originally derived from a survey carried out on New York families in the 1950’s and has since been updated with more relevant Australian data. That calculator looks at a family of two adults and two children and then uses some variants to adjust figures based on more or less people in a family.
The living expense figure we provide the bank with is then cross checked using a HEM or HPI calculation for a similar family in your area and the bank then uses the higher of the two figures as your living expenses estimate and is used to determine how much you can afford to borrow and comfortably repay.
If you would like to know more about how we can help you save money on your home loan then please contact us.