Yes Katrina, things have really changed over the past few years, and even things like going for lunch or eating out regularly can impact your borrowing capacity.

Historically lenders assumed borrowers’ living expenses based on what’s call the HEM index or Household Expenditure Measure. Essentially this is a summary of living expenses that lenders calculated using Australian Bureau Statistics stats, to assess household expenses.

If you had one single applicant, or one adult living in the household they will assume that the living expense is an X amount. If it was a couple, then that living expense or household living expense would increase, since it’s based on two people, and obviously if there was a couple with children, then the living expense that was allocated to the borrower was higher.

The more people in the household, the more children, the less your borrowing capacity. All the lenders use a very similar figure to determine living expenses. Historically the majority of lenders didn’t require borrowers to state a living expense amount on their loan application however recent changes in lending regulations imposed by the regulators (APRA and ASIC) and Royal Commission spotlight on the lending industry meant lenders had to be much more stringent about data collection regarding living expenses.

How has the allocation of living expenses changed?

These days when applying for a loan the baseline living expense figure that lenders are using is much higher than it used to be. For example, a couple with two children living expenses may have only been $2500/$3,000 two years ago, but now those living expenses will not only be based on how many people are in the household, but also on the income of the household.

So, the higher the income in the household, the higher the assumed living expenses, or calculated on the minimum baseline living expense. This is because lenders and statistics have proven that as your income increases, proportionality so do your expenses.

How are expenses categorised?

While lenders continue to use a baseline Household Expenditure Measure (HEM), they will still request evidence or a breakdown of your living expenses when you apply for a loan. That break down will categorize the living expenses into the following sub-categories-

1. Utilities and rates for an owner-occupied property. This will include electricity, gas, water, water rates, council rates, maintenance of the premises and strata levies.
2. Utilities and rates for investment property. Again, this will include electricity, gas, water, water rates, council rates, maintenance of the premises and strata levies. This one’s a bit of a point of conjecture. When lenders look at the rental income from an investment property, they accept 75 to 80% of the rental income and taking a percentage off the rental income to account for those expenses, but this has always a bit of a grey area.
3. The third category is the telephone, internet, paid TV, and streaming services, mobile phone, landline, internet, and Foxtel, Netflix and Stan.
4. Then the next category is groceries, basically all expenses for household food purchases.
5. Recreation and entertainment, so this could include things like alcohol, tobacco, gambling, going out to restaurants, membership fees and subscriptions, gym memberships, magazine subscriptions, pet care, and holidays
6. Clothing and personal care, so that includes clothing, footwear, cosmetics, personal care such as haircuts and nails.
7. Next category is medical and health, so that’s doctors’ expenses, dental, optical and pharmaceutical expenses.
8. Transport expenses, so transport includes public transport, motor vehicle running costs, so that’s fuel, servicing, registration, green slip each year. Then you got parking, and then tolls, which is obviously a big one in Sydney.
9. Then education expenses, which include school fees and that could include private school fees, books, uniforms, any other schooling related expenses.
10. Another big one is childcare, so if you’ve got children that require childcare, that also has to be stated in your application. That could include just day care or including nannies.
11. The other one is insurance, so that includes health insurance, home and contents, motor vehicle, life insurance, income protection insurance.
12. The last category is just other, so anything that doesn’t fit into those above categories would be stated under other.

What has my lunch expenses got to do with my loan application?

When making a loan application you basically need to disclose all related expenses, and what we are seeing is that some lenders are requesting a few months bank statements and actually going through bank statements cross-checking the declared living expenses with what is going in and out of transaction and credit card accounts.

A recent example of this was where an applicant declared a certain food expense or grocery expense, and the lender disputed that because there was money being spent each day on lunches at a takeaway vendor. So that takeaway lunch that you buy each day could actually be affecting your borrowing capacity. This expense could decrease your borrowing power so next time you go and buy a takeaway lunch, maybe it’s worth considering making lunch at home.

A lot of lenders are now asking for bank statements for all accounts and they’re actually checking living expenses, so it may be a good idea to watch your spending in the event your living expenses are reviewed closely. To maximise your borrowing power and to give you all the options possible, really take notice of what you’re spending, and budgeting is probably a good idea in the months leading up to applying for a loan.