Living expenses and how they are calculated
Lenders use 3 methods to calculate your living expenses
- The Household Expenditure Method (HEM)
- Your self-assessed living expenses
- Your bank account and/or credit card statements to assess your monthly outgoings
The bank will use the higher of these 3 options, the highest amount will be placed in their servicing calculator to determine if you can afford the loan
Household Expenditure Method (HEM)
The Household Expenditure Method is a formula lenders use for living expenses based on the size of your household, income you earn and the area you live in.
This helps lenders determine how much you should be able to afford to borrow and still live comfortably
Self-assessed living expenses
When applying for a loan you will need to provide the amount you spend on your everyday expenses
Everyday expenses include:
- Rates and Utilities: Land and water rates, power (for both owner occupied & investment properties)
- School & Child care: School fees, uniform, books, child care fees
- Groceries: Milk, meat, vegies, cleaning products etc
- Clothing and personal care: clothing, make up, footwear; haircuts
- Insurances: Home & Contents
- Transport: Vehicle costs including petrol, rego & insurances; public transport
- Phone/Internet: Mobile, landline, internet
- Health Costs: Health Insurance, medicine, doctor appointments
- Entertainment and Leisure: Meals out, movies, pay TV, regular holidays, gym
Assessment of bank accounts
The lender may ask for your latest 1-3 months bank accounts or credit card statements, they will look over these statements and determine the amount they believe you spend on living expenses each month. If they are your current bank then they will have easy access to your accounts.
It’s important to realise the lender will use the higher of these 3, if you over estimate your living expenses this can cause your loan application to fail servicing and your loan could be declined. An example of an over estimate is putting a family holiday you have been saving for over a long period as a regular holiday. Care always needs to be taken when calculating living expenses.