Borrowing power living expenses

There's certainly more onus on originators in recent years to verify living expenses further and explain them. There'll likely be more coming post RC from lenders to pay more attention.

There's far more push back now from lenders regarding disclosure of living expenses now. Some are making clear changes and going through very thorough exercises to verify actuals nowadays.

Its quite tough for lenders and originators to unpack completely too, as there's often reasons for one months higher expenditure that relates to one-off purchases. There's also transfers between accounts, etc etc that are hard to completely unpick. This obviously makes disclosure and verification tricky...time consuming!

IMO the current method kinda recognises these difficulties exist and have come up with principled ways ways to achieve similar results. One can take a view that its very hard to materially unpack, note that living expenses change post purchases, and increase floor rates (HEM), adjust assessment buffers, etc. I.e. a principle based approach about what is deemed 'affordable' (using HEM).

In a world where the spotlight is on things that aren't too well understood, this gets massive attention. Further regulation may come, likely from those that don't understand its importance and the context of appropriate disclosures to the overall lending environment.

Leave this to APRA to decide. They're far better placed to make these decisions than the other regulators. This was what happened in 2015. 2016/17/18 will have the other regulators jump in, regulate it to death and make getting a loan a very painful experience for the consumer without really adding too much to financial stability or affordability.

 

NAB just assessed us "DINKS" based on no other debt @ $35k min expenses. I put down $1200 a month not including mortgages or rent, they over rode it to $2950 a month net- in Brisbane. $750 a week seems bloody high for basic expenses

 

People in this thread are asking what living expenses to declare. That's not the way it works.

The banks are asking you to tell them what your living expenses are. They then use this in their assessment. They do have a minimum figure which is based on income, family structure and location, but they don't disclose that that minimum figure is.

Yes, this does introduce a lot of uncertainty into your loan applications. You can thank APRA for this, and the Royal Commission for what happens next as lenders start to actually check transaction account and credit card statements to verify borrowers living expenses. It's only going to get worse.

I've attached some old tables that Westpac published almost two years ago. They're out of date and I'm fairly certain there's been increases to these figures, but it make give you some indication of how complex it is. Table 1 is for singles, table 2 is for couples.

 

I believe NAB also take into account the income of applicants. Ie their alogarithms assume a couple on $200k spend more on living expenses than a couple on $50k even though the couple on $200k maybe just as frugal as the couple on $50k.

 

@Peter_Tersteeg is the figure in the spreadsheets the monthly expense or another period of time?

 

It's monthly.

Those spreadsheets are also Westpac specific and might be completely different to other lenders. They're also about 18 months out of date.

 

Hi peter

Do you have a updated sheet ?

 

These are not something that the banks publish. HEMS are updated pretty regularly, and differ between banks.

If you're after a loan, just be honest about your expenses - your broker will have to verify them, and many lenders will double check to varying degrees so it's not something you can just guess at anymore.

We regularly come across borrowers who think they spend 'x' but actually spend "xyz"...which is fine, but it needs to be discussed what's optional vs what's habitual.

 

Does this mean $4,000/m living expenses (food, utilities, school etc..) + credit (mortgage, credit cards)?

Or is mortgage and credit cards included in that $4,000/m?

 

Lenders are asking for detailed breakdowns of living expenses, it's fairly straight forward to hand over the overall picture. Liabilities such as loans and credit cards are a separate item.

Simply answer the questions as asked.

 

If I separate my accounts and have my income going into one account and expenses leaving from another will the bank know, see or care about the other account?

e.g. I get paid into account A transfer funds and pay school fees from account B.

 

Most lenders want to see 1 to 3 (some 6) months worth of transactions for the account where you get paid into and they will see that you regularly transfer money into the other account, they will ask to see that account as well. They ain't that stoopid.

 

Any serious investor who is aiming for a loan will be willing to discipline him/herself with expenses
for X months so as to satisfy a lender's criteria. But once the loan is secured and property
settled, the true behaviours may resume. Probably not dissimilar to one preparing for interview to
impress and secure a job but true colours show once hired

And I am guessing that the lender knows it, and it knows the borrower knows it knows it. LOL

Just an after thought, it will be nice to have a working spouse paying for all/most of the
actual living expenses, while the borrowing spouse declaring his/her share of disclosed
living expenses to be consistently very low vs HEM etc.

 

Do banks accept franking credits and if so is there a haircut and what %?

 

Do the banks calculate a lower figure if you're boarding as opposed to renting?

 

Yes usually. Some assume a nominal rent of $500 per month

 

So that's nominal rent + $1800 living expenses. I was recently assessed with high scrutiny on my expenses at $2050.

 

Yes rents counted separately from living expenses.

 

3 years ago I wrote this...

Today, it's worse. Most lenders want the account you're paid into, the account you do your daily spend from, all your credit cards. Some give these documents a basic glance, others go through them line by line.

At this point myself or my assistant vet clients bank statements to try to anticipate things lenders will ask and mitigate any problems. It's a significant part of the time we spend on each application.

We also ask people to self declare what they spend. 90% of these budgets grossly underestimate what the bank statements say. It's quite common to see people thinking they spend about half what they actually do. Coffee, takeaway and general retail seem to be the worst categories.

Despite this, it appears the work we do up front pays off. Quite often we get an assessor questioning expenses, but we're always able to mitigage it. I've had clients worried that their recent renovations will impact the application, but it's easily explained as non-reoccuring.

In short, living expenses create a lot of work, but ultimately we get through it.