A Closer Look at Living Expenses: Preparing for Your Mortgage Application

Navigating the world of home loans can be daunting, especially when it comes to understanding how lenders assess your living expenses. In Australia, financial institutions utilise a range of criteria to determine your eligibility for a mortgage. One of the most critical aspects is your living expenses. This article will delve into how lenders evaluate living expenses, the factors they consider, and tips for preparing your finances when applying for a loan.

The Importance of Living Expenses

Living expenses are a key component of your overall financial profile. Lenders want to ensure that you can comfortably meet your mortgage repayments alongside your daily living costs. This assessment helps them gauge your ability to manage debt responsibly, reducing the risk of default.

What Lenders Look At

When assessing living expenses, lenders will consider a variety of factors. Here's a closer look at the elements they typically evaluate:

1. Basic Living Costs

These are the essential expenses required for day-to-day living. Lenders typically look at:

• Housing Costs: Rent or mortgage payments, utilities, and property-related expenses.

• Food and Groceries: Monthly expenditure on groceries, dining out, and other food-related expenses.

• Transportation: Costs associated with car ownership (fuel, maintenance) or public transport fares.

• Technology: Monthly expenses for phone bills, internet, streaming services, and other subscriptions that are part of daily life.

• Clothing and Personal Care: Expenses related to clothing, grooming, and personal hygiene products.

  
  

2. Discretionary Spending

In addition to basic living costs, lenders also consider discretionary spending. This includes:

• Entertainment: Dining out, cinema tickets, subscriptions, and other leisure activities.

• Travel: Holiday expenses, including flights, accommodation, and related costs.

  
  

3. Children and Dependents

If you have children or dependants, lenders will factor in the additional costs associated with raising them. This can include:

• Childcare: Daycare or babysitting fees.

• Extracurricular Activities: Costs related to sports, music lessons, and other activities.

  
  

How Lenders Calculate Living Expenses

In Australia, lenders often use the Household Expenditure Measure (HEM) as a benchmark to assess living expenses. HEM provides a standard estimate of living costs based on various household types. While lenders may reference HEM figures as a quick gauge, it's essential to understand that they also consider several personal factors.

Fixed HEM Figures and Personal Factors

Lenders often have a fixed HEM figure they are comfortable with, influenced by several key factors:

• Combined Income: The income of both you and your spouse or partner plays a critical role. A higher combined income can lead to a more favourable HEM figure, as it indicates a greater capacity to manage living expenses and mortgage repayments.

  
  

• Number of Dependants: The more dependants you have, the higher your living expenses are likely to be. Lenders take into account the financial responsibilities associated with each dependent, which can affect their assessment of your overall expenses.

  
  

• Postcode of Residence: The location of your residence can significantly impact living expenses. Areas with higher costs of living may lead to lenders adjusting their HEM figure accordingly, while more affordable areas may result in lower living expense assessments.

  
  

Preparing Your Finances for a Mortgage Application

To improve your chances of securing a mortgage, it’s essential to prepare your finances strategically. Here are some tips:

1. Track Your Expenses

Keep a detailed record of your monthly expenses. Use budgeting apps or spreadsheets to categorise your spending and identify areas where you can cut back.

2. Annualise One-Off Large Expenditures

If you have one-off large expenses (like holidays or significant purchases), consider how these can be annualised. This approach helps present a more accurate picture of your regular spending.

3. Look for Better Deals on Yearly Premiums

Review any yearly premiums, such as insurance or subscriptions. Shopping around for better deals can reduce your financial commitments, making it easier to manage your budget.

4. Be Honest and Accurate

When completing your mortgage application, provide honest and accurate information about your financial situation. Lenders value transparency and may verify the details you provide.

5. Consult a Mortgage Broker

A mortgage broker can help you navigate the complexities of loan applications. They can provide insights into what lenders prioritise and assist in presenting your financial profile in the best light.

Conclusion

Understanding how lenders in Australia assess living expenses is crucial for anyone considering a home loan. By being aware of what lenders look for and preparing your finances accordingly, you can improve your chances of securing the mortgage you desire. Remember, a thorough understanding of your financial situation not only enhances your loan application but also sets the stage for responsible financial management in the future. Whether you’re a first-time homebuyer or looking to upgrade, being prepared is key to achieving your homeownership goals.

Get in touch to discuss your living expenses and what they mean for your borrowing capacity!