#58 Borrow Smart Series – Living Expenses and Loan Approval: What You Need to Know

Lenders’ Assessment of Living Expenses: A Key Factor in Loan Approval.

When applying for a home loan, many borrowers focus primarily on their income and credit score. However, lenders are increasingly scrutinizing applicants’ living expenses as a crucial factor in determining loan eligibility. Understanding how lenders assess your living expenses and why this matters can significantly improve your chances of loan approval. Let’s delve into the key aspects of living expense assessment and how you can navigate this process effectively.

Monthly Costs: The Foundation of Your Financial Profile

Lenders closely examine your regular monthly expenses to gauge your financial stability and ability to manage a mortgage. These typically include:

1. Groceries: Your average monthly spend on food and household items.
2. Utilities: Costs for electricity, gas, water, and internet services.
3. Transportation: Expenses related to car payments, fuel, public transport, or ride-sharing services.
4. Insurance: Premiums for health, car, home, and life insurance.
5. Healthcare: Regular medical expenses, including prescriptions and routine check-ups.

These expenses form the baseline of your financial commitments and give lenders insight into your basic cost of living.

Lifestyle Spending: Discretionary Expenses Under the Microscope

Beyond essential costs, lenders are increasingly interested in your discretionary spending habits. This includes:

1. Entertainment: Streaming services, cinema visits, and other leisure activities.
2. Dining Out: Frequency and average cost of restaurant meals and takeaways.
3. Hobbies: Regular expenses related to personal interests or sports.
4. Travel: Frequency and cost of holidays or weekend getaways.
5. Shopping: Non-essential purchases like clothing, electronics, or home decor.

While these expenses are often seen as flexible, consistent high spending in these areas can raise concerns about your ability to adjust your lifestyle to accommodate mortgage repayments.

Debt Obligations: Existing Financial Commitments

Lenders pay particular attention to your current debt obligations, including:

1. Personal Loans: Regular repayments on car loans or other personal finance.
2. Credit Card Bills: Both the minimum required payments and your typical monthly spend.
3. Buy Now, Pay Later Schemes: Commitments to services like Afterpay or Zip Pay.
4. Student Loans: Ongoing repayments for education debts.

These existing debts directly impact your ability to take on additional financial responsibilities and are crucial in determining your debt-to-income ratio.

The Importance of Accurate Reporting

Providing an accurate picture of your living expenses is crucial for several reasons:

1. Loan Suitability: It helps lenders determine a loan amount that you can realistically afford.
2. Regulatory Compliance: Lenders are required to ensure responsible lending practices.
3. Avoiding Future Financial Stress: Accurate assessment helps prevent overcommitment.

Underreporting expenses might seem tempting to increase borrowing capacity, but it can lead to loan rejection or future financial difficulties.

How Lenders Verify Your Expenses

Lenders use various methods to verify the expenses you report:

1. Bank Statement Analysis: Reviewing your recent bank statements to confirm spending patterns.
2. Benchmarking: Comparing your reported expenses against statistical averages for similar households.
3. Household Expenditure Measure (HEM): Using this industry benchmark as a minimum living expense estimate.
4. Detailed Questionnaires: Requesting comprehensive breakdowns of your spending habits.

Strategies to Improve Your Expense Profile

To enhance your chances of loan approval, consider these strategies:

1. Track Your Spending: Use budgeting apps or spreadsheets to accurately monitor your expenses.
2. Reduce Discretionary Spending: Cut back on non-essential expenses in the months leading up to your loan application.
3. Pay Down Existing Debts: Lowering your debt obligations can significantly improve your financial profile.
4. Cancel Unused Subscriptions: Review and cancel any services or memberships you’re not actively using.
5. Demonstrate Savings Ability: Show a consistent pattern of putting money aside each month.

The Role of Your Mortgage Broker

A mortgage broker can be invaluable in navigating the complexities of living expense assessment. They can:

1. Help you understand what expenses lenders focus on most.
2. Provide guidance on how to present your expenses in the most favourable light.
3. Advise on strategies to improve your expense profile before applying.
4. Match you with lenders whose assessment criteria align best with your financial situation.

Conclusion

Understanding how lenders assess living expenses is crucial in today’s lending environment. By accurately reporting your expenses and taking steps to optimise your spending habits, you can significantly improve your chances of loan approval. Remember, the goal is not just to secure a loan, but to ensure you can comfortably manage your mortgage repayments in the long term.

Work closely with your mortgage broker to prepare a comprehensive and accurate representation of your living expenses. With the right approach and expert guidance, you can navigate the loan application process more effectively and increase your chances of securing the home loan you need.

#buyinvestlive