Monthly Expenditure Calculator
Try our calculator to easily work out your monthly living expenses when applying for a home loan.
Disclaimer: This calculator has made several assumptions and simplifications so it should be used as a guide only. Please seek independent financial advice and consider your own circumstances before making any decisions to borrow money.
Get this right and avoid being declined!
Over the past few years, there have been significant changes to how banks calculate living expenses when assessing your overall borrowing power.
Generally speaking, banks have been casting a wider net on your expenses so to increase your chances of approval it’s important to be accurate in your home loan application.
How do banks calculate your expenses?
Lenders use a few methods to calculate your living expenses. They will:
- Use the Household Expenditure Method (HEM) based on your family size and income because it is considered unreasonable for someone to spend less than HEM each month.
- Ask you to self-assess your living expenses on your home loan application form.
- Review any bank account (cheque or savings accounts) or credit card statements they have access to in order to confirm your self assessment.
- Either accept or adjust your stated expenses to match your bank account history.
- Take the higher of the above living expense assessment methods to calculate your living expenses.
If the lender assesses that you cannot afford the loan amount, they will decline your mortgage application.
Want to know how much you can borrow?
What is the Household Expenditure Method (HEM)?
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.
In addition to this, banks will cross-check this with whether you’re living in a metro area versus a non metro area for each state.
As you can imagine, it can get quite confusing and convoluted, particularly if you know you can cut non-essential living expenses such as gym memberships or eating takeaway.
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.
In essence, it allows banks to determine how much they should reasonably lend to you so you can comfortably afford the mortgage repayments.
In doing so, they’re meeting their obligations under the National Consumer Credit Protection Act 2009 (NCCP Act).
So if you earn $200,000 per year, you’ll have higher allowable expenses than someone earning $50,000.
Give our living expenses calculator a try. It can give you can give you a pretty good idea as to where you stand compared to the HEM.
The use of the HEM method is relatively new, replacing the use of the Henderson Poverty Index (HPI) or Henderson Poverty Line in 2012.
How does a self-assessment work?
For a while now, the Australian Securities and Investments Commission (ASIC) has required lenders to look far beyond the HEM when determining a borrower’s actual living expenses.
When completing a mortgage application, you’ll be required estimate regular ongoing expenses that fall outside the HEM completely.
These expenses include:
- Rent: Including board
- Clothing/personal care: Footwear, cosmetics, apparel, hygiene products and haircare etc.
- Education: Public, private and all associated costs including uniforms and textbooks.
- Groceries: Meat, fruit, vegetables, cleaning products, milk, bread and toiletries.
- Insurances: Health, home, home and contents, life, income, car, motorcycle and boat.
- Investment property: Utilities, rates, repairs and related costs including tax levies, body corporate and strata fees (for units).
- Transport: Public transport like buses, trains and taxis, Uber trips, petrol, registration, insurance, servicing and repairs..
- Connections: Phone (landline), Internet, mobile, Netflix and streaming services, and other subscriptions.
- Childcare: Childcare centre and preschool fees, nanny fees and after school home care etc.
- Medical health expenses: Doctors (GPs), dental, optometry, holistic medicine and specialists that fall outside of bulk billing or what’s covered by private health insurance.
- Recreation and entertainment: Take-out, pets, gifts, concerts, festivals, stage shows, opera, and comedy.
- Owner occupied property: Utilities, rates and related costs including tax levies, body corporate and strata fees.
- Other unique items: Only list if it’s a regular ongoing expense.
Westpac and responsible lending
The compliance dispute between Westpac and Australian Securities and Investments Commission (ASIC) has highlighted that legislation changes could be required regarding responsible lending.
Philip Lowe, the governor of the Reserve Bank of Australia, explained that while the principles outlined in the National Consumer Credit Protection (NCCP) Act was sound, how it was translated in practice needed further clarification.
In September 2018, Westpac admitted to breaches in responsible lending under the NCCP Act.
ASIC alleged that 50,000 of the home loans assessed by Westpac from December 2011 to March 2015 were not serviced correctly as they did not process their client’s actual expense information when checking if they could qualify for a mortgage.
However, the Federal court was not convinced there was a breach in the obligations as a lender could practice their own assessment process.
Furthermore, a borrower’s living expenses alone is not an indication of future spending habits, and some borrowers could tighten their spending behaviour after getting a home loan.
ASIC has said that it would make revisions to the responsible lending guidance that was last updated in December 2019.
How self assessment can go wrong
Inaccurate reporting of your living expenses can very easily overestimate or underestimate your borrowing power.
Mistakes are often made in the following ways:
- Rental expenses should be ignored if you’re buying a home but lenders sometimes lump in all expenses together and ignore this.
- If you forget to add in private school fees, you’ll be greenlit to borrow more than you can afford but this is ok if other expenses can be reduced in the event of hardship.
- If you’re buying a property, expenses such as council rates should be included but most estimate ‘future expenses’.
- Sometimes people include debts they pay in their living expenses but these should be recorded separately in your liabilities.
- People often grossly overestimate living expenses by including discretionary, one off spending such as a large overseas trip or a new car.
- Often people underestimate living expenses on purpose because they are aware that if their living expenses are too high then they may be declined.
You should have a discussion with your mortgage broker to make sure you correctly complete this section of the lender’s fact find.
How will the lender assess my accounts?
If you bank with them then it’s easy. They can see everything!
If you don’t bank then the bank may rely on any statements that you have provided and look for regular debits from your account that were not disclosed on your application.
Average spending is also taken into account.
Where this is really going to change is with positive credit reporting which allows for data sharing between the banks.
Are you self employed?
Often, lenders will see your business expenses and class them as personal expenses.
With the right evidence, you can argue the point with them so that your living expenses are being calculated accurately – a mortgage broker can help you do this.
What if I accidentally declared more than I actually spend?
Unfortunately, the lender may decline your home loan under the assumption that you can’t afford it.
They won’t tell you exactly which part of your living expenses put you over line.
Trying to argue the point with them is very hit and miss.
We’ve had some success with minor changes, cancelling expenses and providing a written letter explaining to the lender that these expenses are no longer regular and ongoing.
The alternative is to apply with another lender who takes a less stringent approach to calculating living expenses.
We know who these lenders are!
Ultimately, you are the only one who knows your living expenses.
If you’re in a position to cancel some unnecessary expenses or you simply made a mistake in your application, get in touch with us.
Call 1300 889 743 or fill in our online enquiry form today.
What if my partner isn’t on the loan?
Are you married or in a de facto relationship?
You need to include your wife or husband’s living expenses because lenders assume they are financially dependent on you.
However, if you can legitimately prove that your spouse isn’t financially dependent on you by providing payslips, some lenders can assess you as having ‘single’ living expenses.
This can make a huge difference to your borrowing power compared to detailing living expenses as a married couple.
What if I have debts with other people?
Joint debts with people not on the loan application are assessed by lenders as if the debts are 100% in your name.
They assume that the person isn’t paying their share – it’s totally insane!
Luckily, some lenders will assess you at 50% of the debt using what is known as a common debt reducer home loan.
Want to get approved the first time around?
The first step is providing accurate details living expenses.
By working with a mortgage broker, they can give a pretty accurate indication of your chances at approval.
Call us on 1300 889 743 or complete our free assessment form today.