In response to regulator intervention and the influence of the Royal Commission findings, the past few months have seen big changes when it comes to borrowing. The regulator now expects banks and other lending institutions to conduct a detailed assessment of the spending habits and living expenses for anyone looking to change their lending or enter a new borrowing arrangement.
If you’re in this situation, it’s important to understand what you need to do today to ensure you’re in the best position to obtain or change your arrangements in the future.
How are My Living Expenses Calculated?
The Household Expenditure Method (HEM) is a benchmark lenders use to estimate a loan applicant’s annual living expenses — this forms part of the overall calculation that determines borrowing capacity. It was developed by using local survey data, is also linked to CPI and factors in the type of household.
Historically, even last year, the HEM was accepted as a measure to estimate income and expenses to assess an applicant’s capacity to repay. But not anymore. In the current climate, the HEM is not viewed as a reflective measure of actual living expenses. Borrowers now need to justify their spending.
What Has Changed?
A new phase in highly scrutinised living expenses by the lenders has begun. Lenders are expected to be extra vigilant when it comes to verifying borrower’s living expenses – a rough estimate is not acceptable. Lenders are now requesting a specific breakdown of each expense category from borrowers, to check that the transactions can be matched with the declared expenses.
There are 10 – 12 categories of living expenses that borrowers must provide a detailed response on (they vary depending on the lender). Expenses declared are being verified with a mandatory three months of the borrower’s most recent bank transaction account and credit card statements.
What to Do Now?
If you know banks will be looking at three months’ worth of transactions, then look at your spending and make conscious choices about whether your purchases will affect your ability to secure a loan. If they will, then consider either deferring your spending or not spending at all. It will make it much easier to apply for a loan, knowing you have a spending history that the banks will be happy with, rather than having to justify individual purchases that don’t match up with what you’re declaring as your spending pattern.
Budgeting apps such as TrackMySpend, PocketBook or even the Bondi Broker Wealth Portal can be very useful to track your spending.
Contact Me Today
If you’re considering a rate change, a refinance, comparing banks, buying an investment property or purchasing your own home, it is important, more than ever, to work with your broker in advance to understand the changes and how they will impact your ability to obtain funding. Contact me today to find out more.