Does income factor into the living expenses calculation?
Many lenders rely on the Household Expenditure Method (HEM) to determine whether your living expenses are reasonable for the amount you want to borrow.
This is largely based on your family unit size, that is, whether you are a single borrower, borrowing as a couple, or borrowing with dependent children.
The HEM table or matrix that banks use also factors in your income level.
To give you an idea, below is the HEM table used by one of our major banks to determine whether your living expenses are reasonable.
| Income | Single applicant, 0 Dependents ($) | Single, 1 ($) | Single, 2 ($) | Single, 3 ($) | Single, more than 3 ($) | Couple, 0 ($) | Couple, 1 ($) | Couple, 2 ($) | Couple, 3 ($) | Couple, more than 3 ($) | Couple, 1 or more adult children ($) |
|---|---|---|---|---|---|---|---|---|---|---|---|
| $0-23,561 | 1,113 | 1,376 | 1,717 | 1,842 | 122 | 1,977 | 2,164 | 2,680 | 2,947 | 264 | 865 |
| $35,341-$41,231 | 1,180 | 1,444 | 1,785 | 1,909 | 122 | 2,044 | 2,232 | 2,748 | 3,014 | 264 | 865 |
| $41,231-$47,122 | 1,287 | 1,551 | 1,891 | 2,016 | 122 | 2,151 | 2,339 | 2,855 | 3,121 | 264 | 865 |
| $53,012-$58,902 | 1,466 | 1,730 | 2,071 | 2,194 | 122 | 2,330 | 2,518 | 3,035 | 3,301 | 264 | 865 |
| $58,902-$70,682 | 1,457 | 1,722 | 2,062 | 2,186 | 122 | 2,322 | 2,509 | 3,027 | 3,292 | 264 | 865 |
| $70,682-$82,463 | 1,625 | 1,890 | 2,231 | 2,353 | 122 | 2,490 | 2,678 | 3,196 | 3,460 | 264 | 865 |
| $82,463-$94,243 | 1,785 | 2,051 | 2,391 | 2,514 | 122 | 2,651 | 2,839 | 3,357 | 3,621 | 264 | 865 |
| $106,023-$117,804 | 1,876 | 2,142 | 2,482 | 2,604 | 122 | 2,741 | 2,929 | 3,448 | 3,712 | 264 | 865 |
| $141,365-$164,925 | 2,193 | 2,460 | 2,800 | 2,920 | 122 | 3,059 | 3,247 | 3,767 | 4,030 | 264 | 865 |
| $188,486-$235,608 | 2,430 | 2,698 | 3,038 | 3,158 | 122 | 3,297 | 3,486 | 4,006 | 4,268 | 264 | 865 |
| $235,608-$1,000,000 | 3,173 | 3,443 | 3,783 | 3,900 | 122 | 4,042 | 4,231 | 4,753 | 5,013 | 264 | 865 |
Disclaimer: This is an example and has been used to illustrate how income can affect a lender’s living expenses assessment. The table does not include all income ranges.
As you can see, the lower your income, the lower the benchmark for what banks consider reasonable monthly living expenses.
The higher your income, the higher the acceptable benchmark, although this is not always the case depending on the lender’s policy (see below).
The other issue for some borrowers is that living expenses benchmarks cap out after you earn a certain income.
Call us on 1300 889 743 or fill in our online enquiry form and we can assess your situation and let you know if you qualify for a home loan.
We’re experts at maximising your borrowing power!
Not all banks will factor in your income!
How banks calculate your income is not always clear-cut and lacks common sense.
When it comes to your income, not all lenders will factor this in when assessing your monthly expenses.
Others will only apply a certain weighting.
The key to maximising your borrowing power is choosing a lender that will consider your entire situation, including how much you earn and where you live.
For example, living expenses tend to be lower in less affluent suburbs yet many lenders will use the higher of your declared living expenses and the HEM benchmark.
Other the hand, living expenses tend to be high in more affluent areas so most banks will rely heavily on your declared expenses and may not factor in all of your income.
Being a high-income earner does not always mean you’ll be approved for the amount you want to borrow because most lenders take a conservative approach.
How can you maximise your borrowing power?
The first step is to call one of our mortgage brokers because we can assess your situation, gather the relevant information to prove your income and apply with the right lender.
In many cases, this involves providing:
- Your last two payslips and most recent group certificate to confirm your income.
- An accountants letters confirming your income if you’re self-employed, although low doc options are available.
- Your last 3 months bank statements and credit card statements (the latter, if applicable).
- A living expenses reduction letter where appropriate as a commitment to reduce your discretionary spending or where certain expenses were once-off.
Call us on 1300 889 743 or fill in our online enquiry form and we can find a lender that will consider your income so you can borrow the amount you need.
