Living Expenses – Tightening Credit Criteria (cont)…
Over the past six months or so, borrowers’ living expenses on loan applications have been under the spotlight, with mortgage brokers seemingly scrutinising further and further, in accordance with lender requirements. On the flipside, borrowers are really starting to push back given some of the unreasonable requests from lenders on verifying actual costs vs declared costs vs industry-regulated HEMS model!
So where is this leading? Let’s explore through the following example…..
A recent applicant regularly made a large number of eftpos transactions from his everyday account. Most of these transactions were for refreshments for meetings held with numerous clients as part of his role. They were seemingly small transactions, generally for coffee/tea and occasional light snacks. Habitually, the applicant takes the receipts back to his office on a weekly basis and the accounts department reimburse him for these transactions out of company petty cash. These transactions show up on the applicant’s everyday account statements provided to a particular lender as part of his application to borrow money to purchase a home.
The lender in this instance scrutinises the applicant’s everyday account statements as a standard process of assessing the loan application, and in this instance, decides to add all the work-related transactions to the applicants personal living costs. They refuse to accept the applicant’s explanation on the work expenses portion, even after verification from the employer was provided - this results in a much lower borrowing capacity position for the applicant. Fair? The general consensus would be ‘NO’!
Cash or Card?
As we noted in a recent newsletter, living expenses are currently the most scrutinised cost items in today’s lending space. Given how lenders have started to really hone in on discretionary spending and classifying most/all of this spending as a living expense, one needs to actually ask is it worth our while to stop using our eftpos cards for basic transactions and start reverting to traditional (and rarely used) cash for much of our occasional spending like coffee, lunch, Uber eats etc. if you are intending to apply for a home loan?
Whilst electronic banking has made it so much easier to transact on a daily basis, here is an example of how it can work against you if your intention is to buy a home. Of course, the lenders and regulators will argue if that is what you are spending, then that is the amount we have to include as living expense! Which is correct to a point. However, if a borrower is currently spending $400pm on fuel commuting to work, and is buying a property where he will be able to walk to the office, and plans on selling his car also, then surely this should be taken into account by the relevant lender as it equates to $100k in additional borrowing potential!
Getting it right…
As we highlighted in our last newsletter, if your intention is to apply for a home loan soon, or even a car loan etc. then you need to be aware that your current and past spending habits will be scrutinised as part of the application process, stock-standard information/documentation you will need to supply e.g. recent pay-slips and the last three months transactions of your bank and credit card accounts will show the lender what your spending habits are, so your living expenses will be based on what these demonstrate.
Please feel free to give me a call on 0438 041 111 to organise a confidential discussion about your home loan position and how we may be able to help.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
All the Best
Peter Vinci - 0438 041 111