All lenders have different methods to calculate your living expenses. This doesn’t mean you are spending what they are quoting but they use this as part of the home loan process.
Under the National Consumer Credit Protection Act (NCCP) lenders must make suitable allowances for your living costs when deciding how much an applicant can borrow. An example of this is a young couple with no dependents will most likely have fewer expenses than a family with dependents. A single individual may have a more active social life may be spending more than a couple or a family with dependents.
What is included in your living expenses?
- Rent including board
- Owner occupied property – utilities, rates and water
- Investment property – rates, water, and maintenance
- Telephone and internet including mobiles
- Pay TV including Netflix, Stan, Foxtel etc.
- Groceries – meat, fruit, vegetables, cleaning products and toiletries
- Recreation and entertainment – sport, movies, holidays, restaurants and takeout
- Pets – insurance, vet visits, food
- Clothing and personal care – hair, beauty, clothing and footwear
- Medical and health
- Transport – fuel, running costs, public transport, taxis
- Education – public or private schooling fees, uniforms, textbooks, and supplies
- Childcare – before and after school care, day care, home day care, nanny and preschool fees
- Insurances – health, home and contents, life, income protection, car, boat and others
- Other – regular ongoing expenses
Living expenses with your home loan application
The Australia Security and Investments Commission (ASIC) requires lenders to look at applicants actual living expenses. When you apply for a new home loan you will need to provide this information. Generally, this is a monthly breakdown of expenses. Some lenders will request one month’s bank statements for your everyday transactional account. The lender that you are applying for a home loan with will compare the figure you provide to the relevant Household Expenditure Method (HEM)* calculation and they will use the higher of the two figures. This will contribute to your borrowing capacity.
Your mortgage broker will guide you in supplying the correct information to pass onto the lender.
* Household Expenditure Method (HEM)
This is the benchmark used for living expense allowances and is based on the size of your household and location.