Knowing your living expenses helps both you and your lender get a clear picture of how much you can afford to borrow.
When you’re applying for a home loan, your lender may require you to fill out a form declaring your living expenses. While some lenders are happy with a rough estimate, others will want a more detailed rundown of your monthly outgoings.
Getting a clear picture of your living expenses will help lenders to determine how big a home loan you’re likely to be able to handle. But filling out a living expenses declaration can be a useful exercise for you as well. When you’re able to identify where your money goes each month, you may also be able to identify potential areas where you can cut costs.
The Household Expenditure MethodSome lenders estimate borrowers’ living expenses rather than relying on the borrower’s declaration. This is often done using a model known as the Household Expenditure Method, or HEM. HEM is calculated as the median Australian household spend on necessities such as food, clothing and transportation, plus the 25th percentile spend on discretionary basics such as entertainment or childcare.
Learn more about HEM
Basic property expenses
A living expenses declaration will first want to know what you spend on some basic property expenses. These include payments for things like council rates, utilities, repairs and/or body corporate fees. This can be calculated by looking at your quarterly spend on these items and dividing it by three to find your monthly spend.
Lenders will also want to know how much you spend each month on necessities such as food, clothing and transport. Many lenders will break these necessities into separate categories.
When calculating your spend on necessities, you should take the extra effort to calculate accurately. It’s easy to greatly underestimate the amount we spend on things like groceries and clothing. Take the time to look at a few bank statements to get an idea of your average monthly spend. Not only will this give lenders a more accurate picture of your ability to service a mortgage. It will give you insight into areas where you might be overspending.
You’ll need to provide information about your regular insurance payments. These could include health insurance, car insurance, home and contents insurance, life insurance and TPD.
If you have a credit card or any other liability such as a personal loan, car loan or HECS loan, you’ll need to include this in your calculation of your monthly expenses. This can also give you a good idea of your credit situation. If you find you’re making regular monthly repayments on several credit cards or loans, you may want to consider consolidating your debt into a personal loan or a 0% balance transfer credit card.
Lenders may also want to know the details of your monthly spend on the Internet, mobile phones and pay TV or streaming services. Again, calculating these expenses can give you a clearer idea of whether there’s an opportunity to save money by switching to a more competitive Internet or phone plan.
Childcare and/or school fees
If you have children, you’ll need to provide details about any childcare fees or regular school fees you have to pay. These can also include fees for school uniforms and additional school activities.
If you have any regular medical expenses such as those for prescriptions or ongoing medical care, lenders will want to know your monthly spend.
In this category, lenders will ask you to provide information on the amount you would typically spend on entertainment and leisure. This includes both activities and discretionary items such as alcohol.
If you have any other regular monthly expenses that don’t fall into the categories listed above, you’ll want to list them here.
Adding together all the categories above will give you a good idea of your monthly spend. To give you an idea of how you compare to the average Australian, the HEM calculation for a family of two adults and two children living a moderate lifestyle with a mortgage in NSW is $6,566 in monthly expenses. If you’re in a similar living situation and you find that your expense calculation is coming in considerably higher than this, you may want to take a look at your outgoings and see if there are any expenses you can cut down on.
Filling out a living expenses declaration is necessary in order to get a home loan from many lenders. However, it’s also a useful exercise for you as a borrower. By getting a more accurate look at your monthly outgoings, you’ll be in a much better position to determine whether you’re ready to take on the financial commitment of a home loan.