How Your Living Expenses Can Impact Your Home Loan Application
Lenders consider a variety of factors when assessing your home loan application. Their aim is to ascertain if you're able to comfortably afford the potential loan repayments.
Your income, credit history, equity, debt & savings levels, all come into play as well as your day-to-day living expenses.
Lenders will request things like bank statements, pay slips, employment contracts etc. & use these to verify the figures disclosed in your application, as well as make sure they are fulfilling their requirements as 'responsible lenders' to ensure you won't be put in undue financial stress or hardship should your loan be approved.
Living expenses play an important role in determining your borrowing power. If you have high living expenses, then there will be less disposable income available for loan repayments, which will reduce your borrowing ability. Conversely, if your living expenses are very low, lenders will be concerned that these are unrealistic & not sustainable over the long term - & are likely to adjust your living expenses to reflect the 'average household' which will potentially decrease your borrowing ability from what you'd anticipated.
So what exactly are living expenses?
Quite simply put, living expenses are the items you spend to maintain a reasonable standard of living.
Things such as:
- Utilities and rates
- Phone bills / internet / streaming services
- Medical, health and fitness expenses
- Car or transport costs
- Recreation and entertainment
- Personal clothing and care
- Education costs/fees
- Children and pets
- Other expenses
They basically cover all the expenses that you have to live on a day-to-day basis, as well of any additional expenses that will be associated with you new home e.g. house insurance, rates, water bills.
One off events like overseas trips, unexpected bills etc. aren't included in your living expenses, as these are often discretionary & don't occur regularly or maybe covered by 'emergency' savings etc.
How lenders calculate your living expenses?
Most lenders will use a combination of methods to calculate 'realistic' living expenses for a household.
Some of these include:
- A lenders own inhouse 'Household Expenditure Measure' that looks at your situation, location & lifestyle, number of children, age & stage of life, to determine what a liveable level of expenditure would be for the average person(s) in your situation.
- Review your bank account statements & credit cards to actually see where money is being spent
- Using your self-assessed living costs provided in your application
The key here when applying for a home loan, is to make sure that the expenses you've declared in your application are backed up by your bank account & credit cards statements. Making sure you disclose ALL your living expenses. Lenders don't look favourably on applications that omit key expense information (that is clearly shown on bank statements) and it will most certainly slow down your loan application.
If you're looking to get a home loan in the future, it can be a good idea to do a 'mock' application (you can use pages 3 & 4 from our online application form) to see how things look. It can be helpful to see where your money is actually going each month & to considering these 5 key questions:
Are you living within your means?
Do I need to make some adjustments to my spending?
Are all my expenses showing on my statements covered off in my application?
Do I have a backup/savings for unexpected expenses?
Do my bank statements show favourable conduct? (no dishonour fees, or regularly moving money out of savings to cover living expenses)
This is a good way to make sure your application will look attractive to lenders in the future. It also prevents any potential unexpected/unwanted surprises cropping up - such as forgotten about credit cards, hire purchases, or memberships.
What do I do next?
If you're serious about applying for a home loan in the future it's a good idea to get in touch with one of the team at Focus Financial. We can help you by working out a realistic borrowing capacity based on your situation, suggest ways to increase your borrowing ability if you have a more expensive property in mind, & ways to make your application more attractive to lenders. Once this is sorted we highly recommend applying for a pre-approval, so you have a better chance of securing that home or investment property of your dreams & have the peace of mind knowing exactly what you're able to borrow.
If you’re ready to embark on your home buying journey and you’d like to learn more about the home loan application process, you can reach out to us here to get the ball rolling.