Banks now require you to provide much more detail around your monthly living expenses when assessing your home loan application.
The problem is that most borrowers don’t know how to complete a living expenses declaration accurately and this can seriously affect your borrowing power.
Steps to complete a monthly expenditure declaration
- Write down what you think you spend per month, even if you’re not 100% sure.
- Download your last 3 months bank statements (and credit card statements, if applicable) and start adding your expenses together.
- Note down discretionary spending where you can either reduce or eliminate your expenses without it impacting your basic living costs.
- Exclude such items as rent or board (they’re fixed expenses), personal loans and regular deposits into a savings account because they’re not ongoing expenses.
- Exclude one-off expenses such as money that you lent to a friend or family member.
How can a mortgage broker help?
We can assess your situation and work out how lenders would view your current spending.
In some situations, you may be able to make reasonable reductions to your spending to enable you to borrow more.
Call us on 1300 889 743 or complete our online enquiry form to speak with one of our highly experienced mortgage brokers today.
We have software that can download data from your bank and calculate your basic living expenses for you!
Where borrowers go wrong with living expenses
When applying for a home loan, some lenders ask you to estimate more than 12 categories of living expenses. Discover more about how banks assess living expenses.
For transactions like groceries, fuel and public transport and utilities, most people have a pretty good idea of how much they spend.
For other ongoing expenses, it can be a challenging to get to an accurate figure so some people add a buffer (sometimes 20-30%) “just to be sure”.
The problem is that banks always use the higher of your declared living expenses, the expenses that actually appear in your accounts and the benchmark for what they consider reasonable for your personal situation.
Essentially, you’re doing yourself no favours.
On the flip side, some borrowers underestimate because they think this will get them approved.
The reality is that your mortgage application will be flagged in the lender’s system and they’ll ask for more bank statements and evidence.
Even if you do earn below what the lender considers reasonable, they will still likely apply their benchmark anyway and your application will either be delayed or declined.
It’s essential that you’re honest about your living expenses because getting approved for a home loan that you can’t afford will hurt you in the long-term.
What are considered as expenses?
Actual living expenses need to be part of your basic cost of living and need to be ongoing.
That means you should include:
- Spending at the grocery store.
- Spending on tertiary education and other training and development courses.
- Direct debits for insurance, Internet, mobile phone, streaming services, and other paid subscriptions.
- Connections to the internet, mobile phones and cable and subscription-based TV.
- Spending on fuel or public transport.
- The cost of childcare, daycare and schooling.
- Owner-occupied property expenses such as council rates, utilities and maintenance.
- Investment property expenses which also include council rates but also management fees, taxes and levies.
- Cash withdrawals, although if it was a one-off expense or it’s an area where you can reduce your spending, make a note.
- Medical health expenses that aren’t covered by bulk billing or private health insurance.
- Credit card transactions, which is different to a credit card debt that you’re just paying off (this is considered to be a fixed debt).
What additional expenses are included when calculating living expenses?
A major lender will also include the following additional expenses when calculating your monthly living expenses.
- Additional primary residence (e.g. strata, gardening, home help services, land tax)
- All secondary residences (e.g. a holiday home that is not rented out)
- Private education (e.g private school fees, tuition fees, books, materials and uniforms)
- Personal insurances
- Beauty treatments
- Overseas travel
- Recreational vehicles and insurances
These expenses are included as part of their responsible lending and regulatory obligations and to capture living expenses at a granular level.
By accurately capturing your monthly living expenses, the bank can provide an accurate figure of how much home loan you can afford.
What is discretionary spending?
As the name implies, this is spending in areas that you can easily cut or reduce when you start making mortgage repayments.
- Gym memberships.
- Ordering takeaway.
- Going to the movies.
- Nights out at pubs, clubs and restaurants.
- Spending at the shopping mall, clothing outlets and other “luxury” item transactions.
- Paid subscriptions.
- Other recreation and entertainment spending such as music festivals and gigs.
These are areas that can be reasonably reduced without affecting your basic cost of living.
The key to approval is declaring to the bank the reductions that you will making to your monthly spend.
Where do people spend a lot without realising it?
Clothing is one area where borrowers can be in denial about how much they spend.
Generally speaking, couples spend around $2,000-$3,000 a year, which may be a hard pill to swallow for some borrowers.
While you may not spend $150 every month, it’s likely that you’ll spend more than that on a one-off item over a 3-month period, say, $500 on a dress or a new suit.
What if you have high living expenses but a good income?
It’s true that some lenders do take income into account when assessing living expenses and some also use a higher benchmark in some affluent locations and postcodes.
However, many other lenders simply rely on a flat living expenses benchmark based on the number of adult applicants and whether you have any dependents.
That means your income level won’t affect how they assess your living expenses.
It’s to best to call us on 1300 889 743 or fill in our online enquiry form because we can let you know where your borrowing power stands.
It may just be a matter of making some small changes to your spending habits in order to get approved.
What if work covers my expenses?
It’s common for employers to reimburse staff for such work expenses as their uniform, mobile phone bill, travel expenses and even provide them with a company car.
As long as you can provide evidence, you should detail in your declaration in what areas your employer covers your costs.
If it’s only a partial reimbursement then you also need to declare this.
For example, if you spend $1,000 a month on travel but your employer only reimburses you $200, this reduces your spending in this category to $800 a month.
The bank will ask you to list any existing debts that you have in the liabilities section of your application, not in your living expenses declaration.
So repayments on an existing home loan, car loan or personal loan should not be included in your declaration.
Specifically, this will be in the investment property and owner-occupied property categories of the declaration.
These are not everyday living expenses but they will be added to your declaration anyway, which can significantly reduce your borrowing power.
It’s our opinion that banks double dip because they use only 80% of rental income to allow for rental property expenses and vacancies.
So if they count this in your living expenses as well it isn’t fair on investors.
This is one of the many reasons there are big differences between the amount lenders will approve for an investor.
Discover if you qualify for a home loan
We can assess your situation and let you know where you stand.
In some cases, we can help you to make a plan to monitor your spending over a 3-month period and cut back in discretionary expenses where appropriate.
Call us on 1300 889 743 or fill in our free assessment form.
We can fully assess your financial situation and let you know if you’re ready to get a home loan.