A combination of tighter home loan lending regulations and the uncertainty in our new COVID world have made looking after your living expenses an essential part of creating a more secure future for you and your family.
Many people are finding out the hard way that it’s not as easy to get a home loan approved as it used to be. The simple reason for this is that financial regulators have set tighter rules for lenders. Now they are required to look more closely at your daily living expenses to get a better idea of your ability to make your repayments now and into the future. Plus, as your broker, the mortgage broker ‘best interests duty’ that was recently legislated means that, unlike a staff member at a bank, there will be legal obligations for me to find you a loan that is best suited to your circumstances.
All of this is not such a bad thing. No-one wants to get a loan that’s too large and puts them under financial stress. By understanding what lenders are looking for and budgeting better, you’ll reduce your spending and start saving more. This makes you look much better in the eyes of a lender, in turn hopefully getting you the home you’ve been looking for.
In this new COVID reality, there’s a potential bonus. We all saw on the news the long lines of people at Centrelink and the reports that many have no savings to fall back on. In these times we all need to plan for the unexpected and be more self-reliant – government support won’t last forever.
Cutting back on living expenses and saving more for a rainy day can provide a real safety net – it’s something we should all consider (while still supporting local businesses, of course!).
Why are lenders looking more closely at our living expenses?
In the aftermath of the GFC and cheap and easy credit, many people were no longer able to make repayments on their home loans. For some, their homes dropped significantly in value, making the mortgages larger than the value of their home.
To make sure this doesn’t happen again, the regulators now require financial institutions to lend more responsibly. As a result, lenders need to make detailed assessments of your ability to make repayments. This means they look at how you spend your money every day.
The old way they did it was to use the Household Expenditure Measure, or HEM Index for short. This basically uses average living expense figures to estimate living costs. These values change if you are single, a couple, have kids, and so on. It follows that the larger the family the greater the expenses.
Now they still use the HEM Index to get a basic picture, but they also require a detailed breakdown of where, when and how much you’re spending.
A rough estimate isn’t enough – you’ll have to detail all your costs. Lenders may also look at your bank account transaction and credit card statements for the last three months or more.
While this may seem a bit scary, the good news is that if you really cut back and watch what you spend for three months, you’ll look like a much better borrower to the lenders. Of course, it’s important that you only cut back to an amount that can be maintained after you get the loan.
The most important thing to understand is what lenders look at when assessing your spending. You can work out where the easiest changes can be made.
Lenders break it down into a variation of these categories.
1. House and property costs. This includes things like utilities – water, gas and electricity – as well as council rates, land tax and property maintenance and costs.
2. Communications and streaming subscriptions. Paying for your telephone and data, and the internet, as well as streaming services like Netflix, Stan, Foxtel, Disney and Spotify can all add up. It’s easy to save some money by moving to a better phone plan and reducing your services.
3. Food and groceries. If you buy it at the supermarket it pretty much falls under this category. This can be a significant amount, especially if you’re feeding a family, so try to look for savings here.
4. Recreation and entertainment. All the fun stuff! Eating at restaurants, movies, concerts, alcohol, tobacco, gambling, club memberships, magazine subscriptions, gym memberships, pet care and holidays are included here. What can you live without to save money?
5. Clothing and personal care. Clothing, footwear, cosmetics, and even things like getting your hair and nails done are covered by this.
6. Medical and health. Many of these are necessities so it could be harder to save here, but this includes all doctors’ expenses, dental, optical and pharmaceutical expenses.
7. Transport. From public transport tickets and Ubers to motor vehicle running costs like fuel, servicing and registration, plus parking and toll costs. One thing to note is vehicle insurance is included elsewhere.
8. Education expenses. You’ll need to account for books, uniforms, excursions and any other costs for school, university or TAFE, plus school fees if your children are in private schools.
9. Childcare. If you have children that need childcare, whether it’s at a centre or a home nanny, you’ll need to state these costs.
10. Insurance. Health insurance, home and contents, motor vehicle, life insurance and income insurance are all important. Rather than get rid of any, consider shopping around for less expensive policies.
11. Everything else. Most of the other categories cover it all. But if there’s anything else, it needs to be included.
Whether you’re looking for a new or first loan, refinancing, or negotiating a rate change, it’s important you always demonstrate to the lender that you can meet the proposed repayments. Reducing your discretionary expenses for a few months will help identify where your savings could improve. Remember that a lender will assume this is ongoing, so make sure the reduction is sustainable in the long term.
As a broker who deals with the lenders every day, we know what they look for. It’s our job to make sure you can do all you need to get the right loan for you. Taking control of your living expenses is just one important part of a bigger picture. If you’d like to get help securing a new loan, please get in touch.
