At your expense: Why taking control of your living expenses is more important than ever
In the wake of the COVID-19 pandemic, the world has become a more uncertain place. And this has created new challenges for those seeking home loans. Tighter lending regulations have made it harder than ever to secure a loan. And lenders are scrutinizing applicants’ living expenses more closely than ever before. To ensure a more secure future for you and your family, it’s essential to take a more proactive approach to budget. And to think carefully about your living expenses.
Have you noticed that getting your home loan approved is not as easy as it used to be? Well, that’s because the financial regulators have tightened their rules for lenders. They now require lenders to take a closer look at your daily living expenses. This is to ensure that you are capable of making your repayments in the present and future. As your mortgage broker, We are obligated by the recent ‘best interests duty’ legislation to find you a loan that is suitable for your circumstances. This means that, unlike a staff member at a bank, we have a legal obligation to act in your best interests.
I know it can seem overwhelming with all the new regulations and rules around getting a home loan approved. But trust me, it’s not all bad news. You definitely don’t want a loan that’s too big and puts you under financial stress. And understanding what lenders are looking for and budgeting better can actually work in your favor. By cutting back on your spending and starting to save more, you’ll look much better to the lenders. And increase your chances of getting the home you’ve been dreaming of.
In this new COVID reality, there’s a potential bonus. We all saw on the news the long lines of people at Centrelink. And the reports that many have no savings to fall back on. In these times we all need to plan for the unexpected and be more self-reliant – government support won’t last forever.
Cutting back on living expenses and saving more for a rainy day can provide a real safety net – it’s something we should all consider (while still supporting local businesses, of course!).
Why are lenders looking more closely at our living expenses?
The aftermath of the GFC led many people to struggle with making repayments on their home loans. The value of their homes had dropped significantly, making their mortgages even larger than the value of their homes. It was a tough situation to be in. To prevent that from happening again, financial regulators have set stricter rules for lenders to make sure they’re lending responsibly.
In the past, financial institutions used the Household Expenditure Measure, or HEM Index. To estimate living costs based on average figures, varying depending on family size. However, lenders must now go beyond a rough estimate and require a detailed breakdown of your daily expenses. They still use the HEM Index as a starting point. But they also need more specific information on where and how much you spend. In some cases, they may even scrutinize your bank account and credit card statements for the last few months. To get a better idea of your spending habits.
Although this may sound daunting, it’s a good thing! Because lenders need to make sure you can handle your loan repayments. They may also scrutinize your bank statements and credit card transactions. To get a more accurate idea of your financial habits. If you cut back on your expenses and monitor your spending for three months, you can improve your chances of getting approved for a home loan. The key is to know what lenders look at and identify areas where you can make adjustments to your spending.
Lenders break it down into a variation of these categories.
1. House and property costs. This includes things like utilities – water, gas, and electricity. As well as council rates, land tax and property maintenance and costs.
2. Communications and streaming subscriptions. Paying for your telephone and data, and the internet. As well as streaming services like Netflix, Stan, Foxtel, Disney, and Spotify, can all add up. It’s easy to save some money by moving to a better phone plan and reducing your services.
3. Food and groceries. If you buy it at the supermarket it pretty much falls under this category. This can be a significant amount, especially if you’re feeding a family, so try to look for savings here.
4. Recreation and entertainment. All the fun stuff! Eating at restaurants, movies, concerts, alcohol, tobacco, gambling, club memberships, magazine subscriptions, gym memberships, pet care and holidays are included here. What can you live without to save money?
5. Clothing and personal care. Clothing, footwear, cosmetics, and even things like getting your hair and nails done are covered by this.
6. Medical and health. Many of these are necessities so it could be harder to save here. But this includes all doctors’ expenses, dental, optical and pharmaceutical expenses.
7. Transport. From public transport tickets and Ubers to motor vehicle running costs like fuel, servicing and registration, plus parking and toll costs. One thing to note is vehicle insurance is included elsewhere.
8. Education expenses. You’ll need to account for books, uniforms, excursions and any other costs for school, university or TAFE, plus school fees if your children are in private schools.
9. Childcare. If you have children that need childcare, whether it’s at a centre or a home nanny, you’ll need to state these costs.
10. Insurance. Health insurance, home and contents, motor vehicle, life insurance and income insurance are all important. Rather than get rid of any, consider shopping around for less expensive policies.
11. Everything else. Most of the other categories cover it all. But if there’s anything else, it needs to be included.
When you’re in the market for a new loan, whether it’s your first or you’re refinancing, it’s important to show the lender that you can make the payments. By cutting back on some of your discretionary expenses for a few months, you can figure out where you can save some money. But remember, lenders will assume that these reductions will continue, so it’s important to make sure that you can maintain them over the long term.
As mortgage brokers, we work closely with lenders on a daily basis and have a deep understanding of what they’re looking for when it comes to loan applications. Our goal is to help you secure the right loan that suits your unique needs and circumstances. And one key aspect of that is taking control of your living expenses. If you’re looking to secure a new loan or refinance your existing one, please don’t hesitate to get in touch with us. We’ll be happy to help guide you through the process and ensure you get the best possible outcome.
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.
Get expert advice for all your financial needs. With our extensive experience in the finance industry, you’ll be able to save time and money, avoid confusion and improve your chances of getting your loan approved.