If you’re looking for a home loan, one of the first things your lender will ask about is your living expenses. That’s because, under the National Consumer Credit Protection Act, lenders must allow for living costs when deciding how much an applicant can afford to borrow.
While some lenders will simply require a rough estimate of your weekly or monthly spend (including rent, fuel, kids’ expenses and other loan repayments) other lenders will use dedicated expense calculators to gain a more accurate assessment of your expenditure.
The lender will then compare those living expenses with the Household Expenditure Measure (HEM) for someone sharing a similar demographic and number of dependants. Generally, they will take the higher of the two numbers as a base for your living expenses.
What is the HEM?
The Household Expenditure Measure (HEM) is a benchmark that estimates an applicant’s annual expenses. It is based on several factors including the state in which the borrower lives, their number of dependants and their lifestyle. A single person’s annual expenses is estimated to be around $34,000 or $64,500 for a family of four.
Calculating Your Own Living Expenses
As a guide, when calculating your own living expenses, you will likely be asked for information on:
- Property expenses – Including council rates, utilities and body corporate fees. You will also need to declare any expenses for investment properties
- Household necessities – Including groceries and clothing
- Transport – Including motor vehicle expenses and public transport
- School fees / child-care – Including day care, nannies, private school fees, public school fees and other education-related costs such as textbooks
- Insurance – Including home, car, life and health insurance
- Debt obligations – Including credit cards and any loans
- Connections – Including telephones, internet and subscription-based TV
- Medical health expenses – Including doctors, dental and other specialists
- Entertainment – Including hobbies, leisure activities, holidays and dining out
Lenders are now regularly asking for evidence of living expenses, such as bank account statements from the last 3 months.
Knowing up-front what your living expenses are, will help both you and your lender obtain a clear picture of your financial situation and borrowing capacity. It is also a great exercise to identify areas where you can save money.
Taking the time to track your expenses as they happen, rather than trying to find the information retrospectively will make the loan application process much easier. There are many expense tracking apps now available that are worth trying out if you’re not a fan of budget spreadsheets.
For more tips on calculating and recording your living expenses to maximise borrowing power, contact Edney Ryan Mortgage and Finance on (02) 9908 9888 or email Tricia Williams.
Patricia Williams is a credited representative (CRN 400458) of BLSSA Pty Ltd (Australian Credit License No. 391237).