During the Banking Royal Commission there was a heavy focus given to the Banks’ use of the Household Expenditure Measure when assessing Home Finance applications.
Some Lenders were criticised for over-reliance on the tool, rather than undertaking analysis of an applicant’s monthly expenditure.
When you apply for Home Finance, you are asked to complete a Monthly Budget to demonstrate you can afford the proposed loan repayments.
Lenders then compare your stated expenditure with information collected from households across Australia by the Australian Bureau of Statistics.
The tool they use to do this is the Household Expenditure Measure which was developed by the Melbourne Institute.
(Some Lenders then also add a loading to the HEM for serviceability purposes)
The Household Expenditure Measure is a powerful tool – but like all tools it needs to be used correctly!
There is no doubt it can be helpful as a guide for Lenders when assessing loan applications.
It can be used to identify where household expenditure may be overly optimistic or understated. To identify instances where further investigation of stated expenditure may be needed.
However, it seems an over reliance on the tool – as distinct from using it as a prudent guide, lead to many of the problems highlighted in the Royal Commission.
In response to the criticism from the Royal Commission, Lenders started comparing applicants stated expenditure with the “lived experience” as shown in their Bank & Credit Card Statements.
Again, like the use of the Household Expenditure Measure, this is prudent if applied in a common sense manner.
However, the pendulum swung too far, and Lenders began assessing expenditure in granular detail!
The end result being, the time taken to get a loan approved increased significantly!
The customer left frustrated, ground down by paper work and bureaucracy!
Whilst there is still a long way to go, we are now starting to see green shoots of change:
- APRA has scrapped the interest rate floor of 7% used to test serviceability and is instead recommending a buffer of 2.50% above current rates be used – which is far more realistic
- Also, the Banks have recognised assessing expenditure in granular detail is simply not practical. They are lobbying the Regulators to allow them to prudently use the Household Expenditure Method to confirm an applicants stated expenditure
Within all this there is a balance! When the pendulum swings too far one way or another, problems will invariably arise!
Whatever methods are ultimately adopted, the key to a successful outcome when seeking Home Finance is – planning!
So, if you are thinking about Home Finance and would like to learn more, call me on 0433 210 353