What are the 3 biggest living expenses – and why do lenders care so much?
Lenders have become increasingly interested in how you are spending your income each month and what your living expenses are.
Do you know what you spend each month?
If you are thinking of applying for a home or investment loan, it pays to look at your living expenses – before your potential lender does. You will be asked to submit a budget. But it’s not enough to estimate the numbers. You need to back it up with bank and credit card statements to show that you have made reasonable assumptions about your expenses. Living expenses are important because they help you work out the surplus cashflow that you have.
What is the Household Expenditure Measure (HEM)?
Lenders will compare what you have declared as your living expenses to the Household Expenditure Measure (HEM). This is a benchmark that lenders use to estimate what ‘an average’ family/couple/individual might spend in a month. Lenders use this to determine if your expenses seem reasonable for your family size. If you have declared significantly lower living expenses than the HEM, the lender may ask for additional information.
Recently we have found that even small variations when compared to HEM will result in the lender scrutinising every transaction in our clients’ savings and credit card statements. Lenders are cracking down particularly on living expenses right now, as they combat the backlash of the Royal Commission into Banking and Financial Services.
The only way around this is to review your living expenses say, three to six months’ out from applying for a loan and work out where your money is going. Out of all the living expenses we need to pay, Housing, food and transport are the biggest contributors. Thinking about how you may cut back in these areas could make a big difference to your weekly budget.
Housing, food and transport are the greatest living expenses
The three largest contributors to household spending in Australia have been the same for many years, according to the Australian Bureau of Statistics (ABS).
Housing, food and transport are the greatest contributors to living expenses
ABS figures reveal three-and-a-half decades ago the largest contributors to household spending were food (20%), transport (16%) and housing (13%), with housing now at the top of that list (20%), followed by food (17%) and transport (15%) respectively.ii
A separate report by Deloitte highlighted that around 37% of Aussies were concerned about their ability to cover expenses, with more than 50% indicating that they expected to pay even more on housing and energy costs going forward.iii
What people would do if costs rose further
When asked, if your day-to-day living expenses increased, where do you think you’d source additional money from, here was the top eight responses in a survey of Australians:iii
Reduce luxury spending – 20%
Buy fewer groceries – 12%
Spend less on transport – 12%
Borrow money via a loan or credit card – 10%
Draw on savings – 5%
Spend less on food delivery and eating out – 5%
Cancel subscription services – 4%
Cancel streaming services – 3%.
What is your surplus cashflow?
Lenders are particularly interested in your regular living expenses and what your level of cashflow is. If you are looking to apply for a loan in the coming months, take a look at your budget and see where you might be able to make some savings. A commitment to reducing your living expenses and a history of regular savings are looked favourably upon by most lenders. Contact Milestone Lending for more information about what loans might suit your needs.
i McCrindle Research – 40 years of change: 1975 to today
ii Australian Bureau of Statistics – Households spending more on the basics
iii Deloitte Access Economics – ALDI household expenditure report