More than ever, living expenses are the main factor that will determine your borrowing power and chances at home loan approval.
What can you do if you’re declined because your living expenses are considered too high the bank?
Review your statements and living expenses
A common mistake that borrowers make is to overestimate their monthly expenditure because they’re unusure of how much they actually spend.
This seemingly responsible approach can actually be detriment to your home loan borrowing power so we advise our customers not add the typical buffer of 20% for such living expenses as recreation and extertainment, and spending on luxury items.
The reason is that these expenses can fluctuate month on month so we find that the better approach is to be as accurate as possible:
- Review your last 3 months transaction statements and statements for any ongoing debts such as your credit card and mobile phone bill.
- Find out what living expenses categories you’ll need to declare and sort your expenses into these categories.
- Separate any recent one off expenses because these can be explained to the lender and excluded from the living expenses assessment.
- Average how much you’re spending per month to get a more accurate figure.
- Make a note of spending in areas where you can easily reduce or cut your expenses in the knowledge that you will soon be making mortgage repayments.
- From this, you will be able to provide a much more accurate estimate of your monthly expenses.
Our mortgage brokers have software that can download data from your bank and calculate your basic living expenses for you.
Please call us on 1300 889 743 or fill in our online enquiry form and we can let you know if your living expenses may stop you from borrowing.
Challenge the lender’s living expenses assessment
It’s unlikely a lender will review their decision once they decline your application due to high living expenses.
The reason is that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been critical about the way some lenders have been assessing living expenses.
The main concern was that lenders were relying too heavily on the Household Expenditure Measure (HEM) and assessing borrowers based largely against this benchmark.
Lenders are now under pressue to take greater efforts to meet their regulatory requirements under the National Consumer Credit Protection Act 2009 (NCCP Act) and make “reasonable enquiries” into a borrower’s financial commitments.
If you’re living expenses are too high, you can either challenge your lender or contact us and we can assess your ability to apply with another bank.
In some cases, the lender will work with you and ask you to make a commitment to reasonably reduce your living expenses.
For example, some common steps our customers have taken is to:
- Cancel gym memberships
- Cancel online and streaming subscriptions.
- Reduce spending on luxury items and fashion.
- Limit nights out to the movies, bars and nightclubs.
- Cook more meals at home rather than ordering take-away.
Regulatory Guide 209, specifically, section 104 and 105 on page 37, makes it clear that a reasonable reduction is acceptable but the interpretation of this differs between lenders.
If a large reduction is required then we may require evidence such as waiting a few months and confirming your living expenses again from your bank statements.
Read more about how banks assess home loan living expenses.
Apply with a lender that takes a common sense approach
Some lenders rely less heavily on the HEM benchmark and will allow you to provide reasoning and evidence for your living expenses.
We can assist to apply with a lender that will work with you if your living expenses are deemed too high by your bank.
Try the living expenses calculator to get an idea of where your living expenses stand in relation to your family situation.