We all know that banks look carefully at our expenses when you’re looking to acquire a home loan.
But just how carefully do they look?
In this article, we’ll explore exactly what banks look at, and what you can do to improve your chances of home loan approval.
Liston Newton Advisory can help you understand how to get approved for a home loan in Australia. We'll work with you to acquire yours with specialist lending advice.
When you’re trying to get a home loan, it pays to know what’s being assessed.
Lenders look at three main things:
- Your deposit;
- Your annual income; and
- Your monthly expenses.
And while many people focus predominantly on the first two considerations, the third is still crucial. In fact, in some cases, it can make or break your chance of home loan approval.
How banks calculate your monthly expenses
Banks don’t just trawl through your bank statements to examine your spending habits. Instead, they use a number of different methods together to calculate your expenses. These work as follows:
- Check your spending against the Household Expenditure Measure benchmark.
- Have you self-assess your own living expenses when you apply.
- Scrutinise any available bank or credit card statements to measure against your self-assessment.
- Measure your expenses against your account history.
- Finally, they’ll take the highest number from these methods to then extrapolate your living expenses.
What is the Household Expenditure Measure (HEM)?
HEM is considered as the standardised benchmark against which your household living expenses are measured. Established by the ATO, the HEM determines the average expenditure for different types of households. It also takes into account your income, where you live, the size of your family, and your lifestyle.
Importantly, the HEM measures your spending on things like essentials, discretionary items, and non-basics.
- Essentials, or absolute basics, are just that. Things like utilities, transport costs, and communications.
- Discretionary items are things like entertainment, alcohol and tobacco, takeaway food, and non-essential clothing.
- Non-basics are typically those luxury items like holidays or choosing to pay for a service you could do yourself, like a cleaner or window-washer.
How do HEM living expenses get calculated?
HEM is calculated as the median house spend on your absolute basics, based on an ABS survey of over 600 typical items. So your spending will be judged against the calculated expenditure for a household of your size, living your spending lifestyle, in your location with your income.
So this can increase depending on the number of dependents you have, whether you live metro or regionally, or the state you live in.
This method has come under scrutiny in previous years, as it doesn’t accurately account for all spending.
But it’s a quick way for a bank to determine within a reasonable margin how much they can safely lend, so you can still manage to pay your mortgage.
How to improve your chances of getting approved for a loan
The biggest recommendation to improve your chances of getting approved for a loan is to prepare for your application far in advance of when you apply.
Lenders typically look at between 3 and 6 months of your spending history by analysing your bank accounts. So by knowing what they’re looking at, you can improve your chances of loan approval.
First, cut out absolutely non-essential spending. This is an obvious one, but it must be said.
Also, think about cutting back on subscriptions, foregoing any large expenses, and reducing your credit card dependency. And if you’re using it, ditch the AfterPay—it’s a spending trap waiting to happen.
A really good question to ask your mortgage broker is: ‘What do my income and expenses need to be?’ They can give you an approximate figure, and you can start planning for this.
On the whole, reducing your expenses is a really good habit to adopt. It helps you prepare for when you actually have the loan, and your cash flow is reduced.
What expenses do lenders assess?
Lenders look at a wide range of expenses, which can be divided into the following spending types:
- Household groceries
- Medical expenses
- Childcare and education expenses
- Health and fitness
- House and property tax
- Technology and streaming
- Entertainment and eating out
When completing your loan application, you’ll be asked to complete a self-assessment that estimates your expenses. You’ll be required to justify how they relate to the averages in your bank statements.
Therefore, your estimates need to bear a close resemblance with reality.
You can make exceptions, such as temporarily high expenses or big one-off purchases. But you shouldn’t rely on these, as each lender is different in how strictly they assess your application.
Other expenditure considerations
There are a few other considerations to take into account.
- Rent. Rent isn’t included in your monthly expenditures if you're planning to buy a home to live in, and no longer rent.
- Buy Now, Pay Later. Some lenders consider expenses like AfterPay to be a debt, which can lead to a request to look at your AfterPay history. So it’s always best to avoid these platforms where you can.
The final word
When it comes to improving your chances of getting approved for a loan, the key is to moderate your spending. And do it now, before you’ve even started your application. The more evidence you can provide that you’re sensible with your spending, the better your chances are.
At Liston Newton Advisory, we can help you start planning for your successful loan application thoroughly. As well as helping you think harder about your HEM living expenses, we’ll help you by:
- Running serviceability calculators to determine your borrowing power.
- Letting you know what lenders look at, and which lenders may be most suitable for your situation.
- Providing you with access to over 25+ lenders.
- Working with you to choose the right lender and the right loan product for your situation.
So as well as taking control of your spending, it’s all about getting the right advice.