How living expenses are calculated on your mortgage application
Do you match the household living expenses?
Preparing for a home loan application can be an unnerving task, especially when you’re trying to work out your living expenses on a weekly or monthly basis.
From 2018 Mortgage Brokers are employing new and specific living expenses calculators in light of recent banking commission reforms.
How does this impact the average Aussie borrower – how does this calculator work?
The new tabled living expenses items and the new living expenses calculator uses family size, location and lifestyle to estimate a potential borrower’s living expenses based on categorized Household Expenditure Measure’s (HEM).
This is the same method used by the Australian Bureau of Statistics (ABS) and by most Australian banks when assessing your borrowing power for a mortgage application. However, recently this has been scrutinized and altered to include more items. The net surplus per month of many potential applicants has decreased so dramatically that on many occasions the applicants cannot meet servicing requirements.
What items are expensive in Australia?
The cost of living in Australia and particularly in inner cities has become significantly higher than most countries, including other developed countries.
You’ll find that the following items are much more expensive:
- Housing (rent and house prices)
- Road tolls and car expenses
However, Australians tend to have a much higher income so it’s still possible to enjoy a good lifestyle.
Which expenses are included?
The living expenses spreadsheets and calculators take all basic living expenses into account such as groceries, utilities, phone, public transport/car and entertainment.
The cost of renting or mortgage repayments is calculated separately so you can replace the figure with your own estimate after you decide where you’d like to live.
An Example of HEM living expenses measure
The cost of living can vary significantly depending on the makeup of your household.
Below are some example results of the living expenses calculator which include the cost of monthly mortgage repayments based on average Australian house prices:
- Living cost in Australia for one person: $2,835 per month
- Average living expenses for a couple – defacto/married: $4,118 per month
- Average monthly living expenses for a family of 4: $5,378
The most expensive cities in Australia
The most expensive cities in Australia are Sydney and Melbourne.
Perth and Canberra are also relatively expensive but it’s people living in the other capital cities such as Brisbane and Adelaide that have some of the lowest living expenses in Australia and enjoy relatively high salaries.
Why do banks use the HEM?
Under the National Consumer Credit Protection Act 2009, Australian banks must make allowances for living costs when they run borrowing power or serviceability assessments for applicants.
This goes above any debts or liabilities they have.
In 2012, it was the Commonwealth Bank (CBA) that switched to the Household Expenditure Measurement and other banks followed.
Banks don’t just rely on the HEM…
Most Australian banks certainly rely on the HEM as a guide but they also use their own measures, adding a buffer based on their own risk appetite.
Another way banks mitigate risk is by using an assessment rate buffer.
By assessing your borrowing capacity at a higher rate, they can determine whether you’ll still be in a comfortable financial position should interest rates rise.
Luckily, a mortgage broker can help you prepare your mortgage application so you can maximise your borrowing power with the right lender.
It must be said that a lot has changed in recent times when calculating a potential borrower’s living expenses. Mortgage brokers must now be aware of credit card debt when calculating an applicant’s living expenses. For example:
If a person has declared they have $2,500.00 per month total living expenses but they are regularly spending $6,500.00 per month on their credit card then it must be stated that a mortgage broker will check with the client whether they are correct and what the extra $4,000.00 per month is being spent on. This obviously dramatically affects a person’s net surplus amount per month and hence their overall approval amount.