We have seen some significant changes over the past few months in the policies relating to home loan lending, which is having a big impact on how much investors can borrow. The most significant change is related to how lenders are calculating applicants living expenses.
Until now, lenders have used a system called the Household Expenditure Matrix (HEM) to estimate applicant living expenses. HEM is an average figure of monthly expenses determined by the median spend on absolute basics, plus some discretionary basics. Unless indicated in the application, this median amount has been used for all applicants, no matter how expensive an applicant’s lifestyle.
Each lender calculates their HEM values differently, but on average, HEM expenses are estimated at approximately $1,650-$1,800 per month, per person. This figure relates to the primary applicant; then there is a lower figure added in for a partner, and lower figures again for each dependent child.
Since the Royal Commission, lenders and brokers are now required to ascertain a full breakdown of exact monthly living expenses as part of the application process. When interviewing an applicant, I now include a detailed expenses breakdown so that applicants can provide what they believe reflects their monthly expenditure. Some of the information I ask for is:
- Estimated amounts spent on groceries
- A breakdown of recreation and entertainment expenses
- Costs involved with the operation and servicing of motor vehicles
- Education expenses
- Expenses related to owner-occupied bills
- Insurances
Some of the commitments I’m noticing are not being included or are being underestimated by applicants include interest-free credit cards, HECS debts and education expenses relating to dependent children.
In my opinion, one of the reason why the royal commission has stepped in and made some significant changes to prevent people from experiencing future financial hardship. Sometimes people weren’t disclosing the true costs of their dependents education or their car payments, this greatly affects their borrowing capacity. I know that there are a lot of brokers and applicants who don’t like, nor agree with the changes because they are finding it harder to gain finance approval for their clients. However, in my opinion, the tighter restrictions will likely be a good thing long term.
The royal commission changes are and will continue to affect lending overall, and unfortunately, it’s not going to be favoured by many people. There is a reason for the changes, and it’s for the benefit of you, the consumer, to ensure you aren’t left in a position of financial hardship and potentially lose everything you have worked hard to build.
Would you like to have a chat about your interest rate and if your current finance deal is the best on the market? Please give MC Mortgage Solutions a call today.
