How living expenses impact my mortgage borrowing capacity

Why are my living expenses important when determining my borrowing capacity? 

When determining your borrowing capacity for a mortgage application, Australian lenders are required by the National Consumer Credit Protection Act 2009 to consider living expenses. This criterion is still in force, although the level of inspection has altered. Living costs must now be precisely gathered and validated to make sure they make sense and are consistent with your financial and personal situation. 

List out your costs on a per-month basis 

Are you able to provide a breakdown on how much you spend on buying clothes or maintaining your car? These are the categories of information that may now be required of you when putting together a loan application. Lenders are asking applicants to categorise their costs rather than lumping all living expenses into one cost. Examples of what to focus on: 

• Groceries 
• Eating out 
• Public and/or private education costs (for you or your dependents) – this is separate from HECS/HELP debt 
• Transport
• Insurance 
• Clothing and personal care 
• Communication (subscriptions, phone bill, internet)
• Childcare 

Provide evidence of this 

We use recent bank and credit card statements, payslips dating back at least three months, and other documentation to confirm your expenses and claimed income. You should expect some level of questioning regarding the disparity if what you claimed are your living expenditures are much less than your realistic monthly spending. If the lender questions anything, more evidence may need to be given to show that discretionary costs are one-time only or are revocable, if necessary, like if you are willing to close off your credit cards to reduce going over your monthly budget or if you were on holiday that month and had more expenses than you usually do. 

You may be asked to submit proof of other financial obligations in addition to these fundamental costs. Those who are renters could be required to provide documents like rental agreements that have been signed and dated or letters from the property manager. Be prepared with bank statements, transaction lists, court orders, or letters from the child support agency if you have child support or other outstanding debt commitments. You can also be required to sign a financial acknowledgement attesting to the accuracy of the data you’ve provided regarding your income, expenses, and liabilities. 

Bank benchmarks 

Numerous lenders have historically utilised the HEM (Household Expenditure Measure) benchmark as a guide to the typical household costs for a spouse or family. HEM considers the number of dependents in your family, the state you reside in and the family taxable income. Lenders frequently include a buffer in addition to the HEM benchmark to protect against the possibility that borrowers will face financial difficulties if interest rates rise. The lender compares the borrower’s estimated total living costs to the HEM estimate and uses the higher of the two amounts to determine borrowing power.

Jeremy Harper is the director of hfinance. hfinance is a mortgage brokering business, to speak with a Sydney Mortgage Broker, Gold Coast Mortgage Broker or an Australian expat mortgage broker. Contact by calling us on 1300 928 227 or email info@hfinance.com.au. You can also book a meeting directly below.