How do banks calculate my living expenses for my mortgage application?

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Nicolson
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Joined: Thu Sep 13, 2018 2:12 pm

How do banks calculate my living expenses for my mortgage application?

Postby Nicolson » Thu Sep 13, 2018 2:28 pm

I'm planning to obtain a mortgage to buy a house in Brisbane. I have a partner and a 3-year-old daughter. We’re planning to purchase a property. So, we want to get a basic idea about borrowing power. My primary question regarding this is whether my living expenses will affect my borrowing power directly? Or is this something only certain lenders like non-bank lenders look at? Hope to get an answer from you soon.

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Otto Dargan
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Re: How do banks calculate my living expenses for my mortgage application?

Postby Otto Dargan » Thu Sep 13, 2018 3:26 pm

Hi Nicolson,

Living expense is one of the several factors that may affect your borrowing power. When calculating your borrowing power, lenders treat living expenses differently and if you have a big family, this makes a huge difference.

This living expenses calculator takes your income and expenditure and provides an accurate indication of how much you can afford to borrow.

Most of the lenders now use the Household Expenditure Method (HEM) to calculate your living expenses. Prior to 2012, lenders were using the Henderson Poverty Index (HPI) method. As per HEM, your monthly expense is $2,583, i.e. monthly expense for a couple and a dependant.

You’re required to estimate your living expenses while applying for a mortgage, to determine whether you’re above or below the average cost of living.

The bank will also review any bank account or credit card statements they have access to in order to confirm your self-assessment. Finally, they’ll take the living expenses as estimated by you or calculated the HEM or your statements, whichever is higher.

Recently, banks have been under pressure to have stringent measures in place to meet their National Consumer Credit Protection (NCCP) obligations. And choosing between the three will enable them to meet those obligations.

Please discuss it directly with one of our experienced mortgage brokers on 1300 889 743 if you're worried about the impact of living expenses on your borrowing power.

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Nicolson
Posts: 3
Joined: Thu Sep 13, 2018 2:12 pm

Re: How do banks calculate my living expenses for my mortgage application?

Postby Nicolson » Thu Sep 13, 2018 5:02 pm

Yes, our total expense comes around $3000 monthly. Could you let me know how the banks calculate our borrowing power?

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Otto Dargan
Mortgage Specialist
Posts: 7021
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: How do banks calculate my living expenses for my mortgage application?

Postby Otto Dargan » Thu Sep 13, 2018 6:17 pm

Hi Nicolson,

Most lenders use the same basic formula when calculating your borrowing power.

However, there can be a lot of variation in the way they assess your expenses, with some lenders require adding a buffer that seriously impacts the final amount you’re eligible to borrow.

They have the formula to calculate your borrowing capacity. It’s given by: Gross income – tax – existing commitments – new commitments – living expenses – buffer = monthly surplus.

For example, $10,000 per month income – $2,000 per month tax – $500 per month existing credit card payments – $3,000 per month new home loan – $2,000 per month living expenses – $500 buffer = $2,000 per month surplus, which would ‘pass’ the lender’s serviceability calculator.

Call us on 1300 889 743 or complete our free assessment form to talk to one of our mortgage brokers who can get you competitive rates for your home loan application.

Cheers,
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Nicolson
Posts: 3
Joined: Thu Sep 13, 2018 2:12 pm

Re: How do banks calculate my living expenses for my mortgage application?

Postby Nicolson » Thu Sep 13, 2018 8:00 pm

Hi Otto, thanks for the information. I’ll call you next week and discuss further. Cheers.


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