What are living expenses and how do they affect my home loan?
To sum it up simply, living expenses are what you spend day to day.
Living expenses can be divided up into two areas; essential (like food, transport and housing) and non-essential (like eating out and going to the movies).
Living Expenses also includes lots of other things that we don’t always think of. Like going to the hairdresser, health care, holidays, clothing, fuel, pet grooming and gambling.
And we’re finding lenders are asking for increasingly detailed summaries of what your living expenses are when they asses your loan.
Historically, living expenses were assumed to be the same for everyone. Whether you earned $50k per year or $500k per year, your expenses would be calculated in exactly the same way (although you can probably assume someone earning $500k per year is likely going to be spending more than someone earning $50k).
Why are living expenses changing?
In the past, it was common to use a general calculation called the Household Expenditure Measure (aka HEM) to estimate what people spent on average.
But consumer spending habits have changed over time, and may now be different to the habits this index was based on when it was created. In a world of online shopping, Uber Eats and same day delivery – impulse spending is on the increase.
So, over recent years there’s been a shift to base living expenses on your actual income and dependents – rather than a simple calculation assuming every person has the same general expenses.
We think this is a good thing.
It’s important your lender understands what your actual financial situation looks like – if you’re spending substantially, even though you may have few debts and a high income, then they may calculate what they’ll lend you differently.
Yes, if you know you’ve got a home loan to pay each week you won’t go out for that beer and burger with your mates. It’s easy to say this, but the reality is, changing your behaviour can be more difficult.
How do I know if I’m spending too much?
The first question is – are you spending more than you earn? If that’s a no, then you’re headed in the right direction. Beyond that, everyone has different circumstances, habits and activities they participate in and so your expenses are going to differ from household to household.
Have a chat with us, we can help you pull together a comprehensive saving and budget plan that will ensure you are in the best possible situation for your loan to be approved.
How much can I borrow?
Every home loan is assessed slightly differently at each of the lenders. There are a range of different variables the lenders consider when calculating how much you can afford to borrow and repay safely, especially if there are changes to interest rates. It’s best to speak with your mortgage broker first, review what products are suitable for your circumstance and then look at how much you can borrow.
Rather than looking at how much you can borrow, it’s a good idea to have a look at how much you can afford to repay – this will be a good starting point for you when looking at new property. Check out our repayment calculator here to get started.