How Your Living Expenses Impact Your Loan Application

When assessing home loan applications, lenders take a variety of factors into account to ascertain whether you will be able to comfortably afford the loan repayments. Lenders are required to do this by law in order to meet ‘responsible lending’ guidelines. The National Consumer Credit Protection Act 2009 (National Credit Act) states that lenders must ‘make reasonable enquiries about’ and ‘take reasonable steps to verify’ the borrower’s financial situation, in order to ensure that they will be able to pay off their loan without falling into substantial hardship.

Income, credit history, equity, debts and savings are all generally taken into consideration when assessing your suitability for a loan, but it is important to note that your day-to-day living expenses are also taken into account.

Living expenses can play an important role in determining your borrowing power and your chances of securing home loan approval. If a lender believes that your living expenses (in comparison to your income and other factors) may impact your ability to repay your mortgage, your loan application may be declined.

What are living expenses?

Living expenses are the items you spend money on to maintain a reasonable standard of living.
Living expenses include items such as:

  • Groceries
  • Utilities and rates
  • Phone bills / internet / streaming services
  • Medical, health and fitness expenses
  • Transport and auto
  • Recreation and entertainment
  • Personal clothing and care
  • Education
  • Insurance
  • Children and pets
  • Other expenses

It is important to note that one-off discretionary expenses, such as your pet’s operation bill or flights for an overseas holiday, are not required to be included in your living expenses. These are one off events and your mortgage broker can explain these to the credit manager with appropriate notes in your home loan application.

How do lenders calculate your living expenses?

Lenders use a few different methods to calculate your living expenses. Some of these include:

  • The Household Expenditure Measure (HEM). HEM is a benchmark many lenders use to estimate an applicant’s annual living expenses. Developed by the Melbourne Institute: Applied Economic & Social Research, the Household Expenditure Measure takes into account things like the borrower’s location, number of dependents, and their lifestyle (student, basic, moderate or lavish). HEM is defined as the median spend on absolute basics (such as food, utilities and transport) plus the 25th percentile spend on discretionary basics (such as entertainment, alcohol and childcare), while non-essential expenses are excluded.
  • Self-assessed living expenses (provided by the home loan applicant)
  • The applicant’s bank account statements and credit card history

Lenders generally look at your bank account statements and credit card history (your actual outgoings) to verify the self-assessed living expenses figure provided. Some lenders then compare this information with their HEM calculation and take the higher of the two as your living expenses total. This is then taken into account when assessing if you will be able to comfortably afford a loan, and for how much.

I want to apply for a home loan but I’m not sure what my borrowing capacity is

Before applying for a home loan, consider contacting a MoneyQuest mortgage broker. Our finance specialists can assess your borrowing capacity using our bespoke ‘Client Living Expenses Calculator’ form and a bank statements service. Once your potential borrowing capacity is determined, our brokers can then assist you with securing pre-approval, which will give you an indication of how much you’re likely going to be able to borrow from a lender.

If you’re ready to embark on your home buying journey and you’d like to learn more about the home loan application process, reach out to your local MoneyQuest mortgage broker to get the ball rolling.



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