How do banks calculate my living expenses?

Any general questions you might have in regards to loans and finance.
KHATREE
Posts: 9
Joined: Tue Mar 20, 2018 9:22 pm

How do banks calculate my living expenses?

Postby KHATREE » Wed Dec 26, 2018 3:40 pm

I'm thinking to buy a house in Brisbane. I have a de facto partner and a three-year kid. We’re looking to buy in the range of $600,000. We have enough savings, around $100,000 towards this purchase.

I want to know how banks calculate our borrowing power. Do they have any special method to identify our living expense or do they accept whatever expense we provide to them? Hope to get an answer from you.

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

Postby Otto Dargan » Wed Dec 26, 2018 5:06 pm

Hi KHATREE,

All banks view your living expenses while assessing your home loan application apart from other factors such as savings, income and employment. They will take all of your basic living expenses into consideration such as child care, personal care, insurance, utilities, connections and transport expenses.

Banks calculate your borrowing capacity and see if you can make regular repayments on your home loan.

Before 2012, lenders used the Henderson Poverty Index (HPI) but then most switched to the Household Expenditure Method (HEM) for calculating your living expenses, which offers a more realistic figure for living expenses.

Usually, banks have up to 13 categories they require you to provide accurate expense details for. All the big 4 banks - Westpac, ANZ, CBA and NAB - are very much reliant on the HEM when appraising living expenses.

Nowadays, banks not only rely on the HEM. They ask for additional information and supporting documents to give an “accurate view” of your expenditure. If you apply with a broker, you are required to have a discussion with your mortgage broker to make sure you correctly complete this section of the lender’s fact-finding.

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

KHATREE
Posts: 9
Joined: Tue Mar 20, 2018 9:22 pm

Re: How do banks calculate my living expenses?

Postby KHATREE » Wed Dec 26, 2018 5:48 pm

What if my living expenses are greater or lower than HEM? Our family expenses are usually $3,000 a month.

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Otto Dargan
Mortgage Specialist
Posts: 7484
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: How do banks calculate my living expenses?

Postby Otto Dargan » Wed Dec 26, 2018 6:57 pm

Hi KHATREE,

The HEM is the benchmark that banks use for living expense allowances based on the size of your household, whether you’re a single applicant, a couple or you have dependents.

Additionally, banks will cross-check this with whether you’re living in a metro area versus a non-metro area for each state.

For example, some lenders will consider the average living expenses for a couple earning $59,382 to $71,258 living in metro Queensland to be $2,317 per month. This may jump to $2,496 per month when you add one dependent and $3017 when you add two.

However, they’ll take the highest of the two between HEM and your own declaration.

So, if your expenses averages around $3,000 then it’s highly likely that banks will consider the highest of the two while calculating your borrowing power.

Call us on 1300 889 743 or complete our free assessment form to talk to one of our mortgage brokers.

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

KHATREE
Posts: 9
Joined: Tue Mar 20, 2018 9:22 pm

Re: How do banks calculate my living expenses?

Postby KHATREE » Wed Dec 26, 2018 7:37 pm

That was very informative and well explained. Thanks, I think it would be better I discuss my situation and everything with one of your guys over the phone. Cheers.


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