Are you still planning to buy your dream home?
There is a real concentration on saving a deposit to enable that dream home purchase: Continual discussions of affordability emphasise that, and for many it is the primary stumbling block.
However, there is more required to enable a successful loan application than that. Some do not realise how many hurdles, large and small, there are to overcome.
Today we concentrate on living expenses, how important that is in determining how much you can borrow – and if you really can afford that dream home!
In a loan application, banks will assess your income and your expenses to determine your free cash flow available to pay loan repayments. How your living expenses are calculated will vary bank-to-bank, but in general two key metrics are applied:
1. The Household Expenditure Measure (HEM)
The HEM is a benchmarking tool used by lenders to allocate an expected cost of living. It will vary with household size (dependents), location, and income. Whilst the numbers are based on Australian Bureau of Statistics data, each bank will have their own interpretation of HEM numbers applied within loan applications.
What the HEM does is set a minimum expected basic living expense number for each application.
2. Your Living Expenses
In a loan application you will be asked to declare your living expenses. Your declaration may be required to be verified by your bank account and credit card statements. If your declaration of living expenses is below HEM you should expect additional scrutiny of your application, and that the bank will apply their minimum expense number anyway.
Importantly banks will categorise some regular expenses to be on top of the HEM minimum number. Such allocation can be the difference between a loan application being successful or failing. Luckily, different banks have different rules, so there can be flexibility. Which is the best bank for you may vary after living expense detailed analysis.
What This Means For You
Your lifestyle and spending habits matter, both before and after buying a home. Budgeting in the pre-purchase stage will enable you to build your deposit faster and assist in the loan application.
It will also ensure that you are comfortable with your own ability to afford that loan. Obtaining your dream home is not an end in itself, meeting ongoing loan repayments to keep the home and eventually pay off the debt is the goal.
Are you planning to buy a new home? Or just a dreamer? If you are planning to buy, then you will have a plan.
Cut the discretionary spending, limit personal debt obligations, check your credit score. These should all be part of the plan.
Your broker can assist you in that planning. It’s complicated! Another reason over 70% of residential home loans settled in Australia are now lodged via mortgage brokers. Did you know mortgage brokers are under a statutory obligation to act in the best interests of consumers, an obligation that does not apply to banks? Quality brokers will work with you through the planning stages, assisting you in obtaining your best possible outcome.
Integrity Finance Australia has been serving the community since 2006. If you have any questions or want to know what your options are with your refinancing, borrowing capacity or your home loan, then please email support@ifafinance.com.au , or call us on 03 9511 8883.
Integrity Finance Australia – Changing Lives