THE RULES HAVE CHANGED: HOW BANKS MEASURE YOUR LIVING EXPENSES

In the wake of the recent Banking Royal Commission, there have been a few changes to the lending rules. So, if you are thinking about applying for a loan in the future, you should be aware of how these new rules will affect you and your borrowing capacity.

One of the most significant changes involves how banks assess your living expenses and what you actually spend across the following categories:

  • Housing, property, rent and utilities

  • Recreation, entertainment, communication and media

  • Food and groceries

  • Pets

  • Clothing & personal care

  • Medical & health related expenses

  • Education

  • Childcare

  • Transport

When applying for a loan in the past, banks used something called HEM (Household Expenditure Measure), to determine your living expenses. HEM is an estimated minimum amount that a family needs to spend to run a very basic life with almost zero luxuries. Banks would still ask you to estimate what you actually spent your money on in a single month, and would take the greater figure, your estimate or HEM.

However, the problem is that most people underestimate what they spend and therefore the HEM figure was more often used by the banks. To further compound the problem, the commission found that HEM was a poor guide to use when assessing what families actually spend. Banks have now been directed to exercise due diligence on all applications before approving loans based on HEM.


SO WHAT’S CHANGED?

Banks now want to see 1-3 months of bank statements and credit card statements to obtain a more accurate representation of what you actually spend your money on, thereby reducing the likelihood of underestimating your living expenses.

WHAT CAN YOU DO ABOUT IT?

If you are looking into securing finance in the future, you will need to get your living expenses in order for 3 sequential months, in order to prove to a bank you can afford to take out a loan. 

Easier said than done, I know, but if you are looking at buying a property or refinancing soon, let’s get together and plan how you can structure your living expenses, making you an attractive proposition for the banks.

- Michael De George