The game has significantly changed for borrowers when it comes to Home Loan Eligibility Criteria – particularly as it relates to applicants’ monthly expenditure.
Many applicants are surprised and somewhat overwhelmed by the amount of information they now need to provide!
In the past, when you applied for a loan, Lenders would establish your ability to service the borrowings by:
- Confirming your income, (via payslips, Bank Statements etc)
- Comparing your stated monthly expenditure to Household Expenditure Measure tables
The Household Expenditure Measure (HEM) Tables draw on Australian Bureau of Statistics data and gives Lenders an insight as to typical monthly expenditure (living) for people in a range of circumstances. For example, singles, couples with no children, couples with children, those receiving child support etc.
Home Loan Eligibility – Show me the money!!!
However today, in addition to comparing an applicant’s stated expenditure to HEM Tables, to confirm applicants meet Home Loan Eligibility Criteria, Lenders now compare what is included in the Monthly Budget, against actual expenditure. They do this reviewing at least three months Bank and Credit Card Statements.
In other words, if for example you state that you spend $x on food, the Lenders will check your Bank and Credit Card Statements to confirm this is actually the case!
Items we overlook that can affect our Home Loan Eligibility
When it comes to Home Loan Eligibility and Expenses, the biggest problem seems to arise around discretionary expenditure – which in isolation may not seem significant – but over a month/year can certainly add up – things like:
- Our daily coffees
- Purchasing lunch
- Gym memberships – Sporting Activities
- Movies, shows, entertainment
- Alcohol or cigarettes
- Holidays or weekends
- Pay TV and/or Music Subscription services
- Children’s sport and/or after school activities
- And much more
Perception vs Brutal Reality!
We are not suggesting someone looking to apply for a Home Loan or Property Investment Loan should stop enjoying life!
Rather to be aware that when compiling your monthly budget, be mindful that ALL your monthly expenditure will now be taken into consideration.
In the cashless world of debit cards, credit cards. and “tap and go” I think it is fair to say most of us are often surprised when we compare our estimates to brutal cold reality!
It can be a wakeup call – like jumping into a bath of iced water!
Plan Ahead and Get Home Loan Ready!
If you are starting to think about buying a home, undertake major renovations, or buy an investment property, it pays to plan ahead!
At least three months before submitting your application, go through your Bank Statements and do a reality check. Find out how you are currently spending your money.
Do a budget and then check, based on your current commitments and spending patterns, if you can actually afford the repayments that will be involved.
Decision time – how much do you want that home!
If the answer is marginal or no – then decide what changes need to be made – what you are prepared to give up or trade off to give yourself the best chance of getting the finance you need.
Then importantly, stick to that budget, track your expenditure for at least 3 months before applying for your loan.
That way, you will be able to present Bank and Credit Card Statements to confirm, based on your spending patterns, you can actually afford the repayments on the loan you are seeking!
An easy way to track your expenditure
Apart from online banking, there are now many terrific Apps you can use that will help you track your expenditure and get Home Loan ready!
One free App that I like is ASIC’s – “Track My Spend”
What I particularly like about this App is the ability to categorise your expenses into “needs” and “wants”!
(Confession! When you use the App, it is surprising how many items fall into the “want” rather than “need” category!!!)
While for many, the current approach by Lenders may seem over the top the reality is, whilst yes it does involve more work and paperwork – the end purpose is to ensure we can service the debt we are seeking!
It is also designed to ensure your dream home or investment, doesn’t end up causing a whole lot of stress and sleepless nights!
For most of us buying a home or an investment property is a major step – it is also something worth making a few sacrifices for – we give up a few things to get something much bigger and more important.
By understanding the current Home Loan Eligibility Criteria and planning ahead, you can make the whole process a lot easier and help ensure you get the finance you need – without a lot of unnecessary delays or frustration!
If you would like to learn about Home Loan Eligibility Criteria, don’t hesitate to give me a call on 0421 304 990