By Malcolm Anderson
The recent Financial Services Royal Commission has certainly shaken up the finance industry.
One of the key results is that loan providers (lenders) and loan facilitators (finance brokers) are now under increased scrutiny to ensure they meet responsible lending requirements under the National Consumer Credit Protection (NCCP) Act.
Under NCCP regulations, lenders and brokers must make reasonable enquiries, take reasonable steps and verify provided information to ensure they are not placing consumers into an “unsuitable” loan contract that may cause future financial hardship.
A key component of this assessment is living expenses.
Lenders typically work with Household Expenditure Measure (HEM) benchmarks to assess living expenses based on household income, locality (e.g. NSW v SA) and household type (single, couple, family with dependents).
HEM is broken down into basic expenses to live (groceries, clothing, utilities, transport etc.) and discretionary non-essential expenses such as entertainment, alcohol, restaurants, holidays and the like.
Historically, when declared living expenses were at or over HEM then generally that part of the assessment process was considered satisfied.
However, since the Royal Commission, this assessment criteria has been subject to far deeper examination. In some cases, lenders require recent bank and credit card statements to verify claimed living expenses. Many loan applications are now being delayed or rejected outright because there are discrepancies in claimed living expenses and what the evidence shows.
Most people taking on a financial commitment will adjust their discretionary spending to ensure their financial commitments are met.
The repercussions of not doing so include a poor credit record, which can be detrimental when seeking future finance contracts on everyday items such as phone plans and payment plans for consumables.
I feel this fact has been somewhat overlooked in the new lending environment to the detriment of common sense in some cases.
If you are likely to be seeking a new home loan or refinancing to take advantage of a better rate, it is important to realise that your living expenses will be under intense scrutiny. Irrespective of what you earn, lenders will be looking at your spending habits.
If it can be shown that there are “lumps” in your expenses such as the big holiday, unexpected medical expenses, 21st birthday parties (I’ve just had one in my family) or weddings (about to pay for one) , then these will be allowed for. You may also be coming off years of paying private school fees.
If you overspend in some discretionary areas (quality red wine is my indulgence) but can show this will be reduced by preparing a budget, providing it is not unreasonable, this will work favourably when assessing living expenses. There are a number of budgeting tools on the internet to assist with this as well as online apps like ASIC’s TrackMySPEND.
When thinking about taking out a loan you may be doing your calculations on whether you can afford the repayments based on the current interest rate, now in the 3-4% range. Lenders will assess all existing and new home loan repayments at an assessment rate which is generally 2.5%- 3% higher. This is to ensure you can afford your loan/s in an increasing interest rate environment.
Credit cards can also heavily impact loan affordability assessment and the amount you can borrow. Monthly repayments for these are based on the total credit card limits, not the usage, even if you pay them off in full monthly. So if you have a high limit and don’t use it or have credit cards that you don’t use, then it may be worthwhile considering cancelling unused cards and reducing the limit on used cards to align with actual monthly usage. This may significantly increase your borrowing power.
If you are six months away from a potential finance application for something like a new home, home improvements or a new car, then have a look at your spending over the past six months.
Then see a finance broker who will do a preliminary assessment based on your current circumstances. This will give you an indication of the likelihood your loan will be approved swiftly, or what steps need to be taken to increase your chances of approval in six months’ time.
It is important to note that any current short term funding through providers such as Zip Pay will be picked up on your credit check and/ or bank statements. Lenders will include these repayments if current as ongoing commitments despite their short term nature.
Lenders also are far more cautious if they see any expense items relating to gambling.
A good habit for potential first home buyers is to determine what your loan amount and repayments are likely to be at the actual interest rate and then put that amount aside each month for at least six months. This link will direct you to calculators to assist.
If you are renting, that will be taken into account, but if the potential loan repayments are likely to be higher than the rent, then save that extra amount each month.
Again, a visit to a finance broker will assist you in determining how you can work towards your first home.
If you pay more attention to your living expenses and come to your appointment well-armed, then the process will be more efficient, less stressful and may avoid disappointment.
Get In Touch
If you require assistance in obtaining Finance, contact Malcolm Anderson, William Buck Finance Manager on (08) 8409 4333 or 0437 016 792.
William Buck Finance (SA) Pty Ltd are Authorised Credit Representatives of William Buck Wealth Advisors (SA) Pty Ltd Australian Credit Licensee 230637 and a member of the Australian Finance Group.