When borrowing money, the focus is now on your household living expenses.
Traditionally, loan applications have been initially assessed on how much deposit/equity you have, and then how much income you have. If these guidelines are met, factors such as assets, liabilities, employment, property etc. come into consideration. Whilst deposit/equity and income are still the most important factors, the new focus is on the borrower’s monthly living expenses. These expenses vary greatly depending on who you are, where you live, the size of your family as well as your spending habits. This new initiative of checking monthly expenses is a direct result of ASIC’s push for responsible lending practices, and flows down from ASIC to the bank to us as brokers and finally to you as the client. Lenders must now ensure you will have enough money to maintain your lifestyle after you have made your loan repayments.
Unfortunately this process is not just a matter of stating your expenses. The lender is expected to verify your declared expenses against your bank statements. Lenders will be looking for a breakup of what you spend your money on, not just a total figure each month. The breakup includes the amounts you budget for utilities and rates, telephone and internet, pay TV, groceries, recreation and entertainment, clothing and personal care, medical and health, transport, education, childcare, insurance and any other household living expenses not already accounted for. In this instance we only need personal expenses, not business expense or any expense relating to investment properties, as these are allowed for separately.
Unless you are very pedantic with your money, and check budgets against what you actually spend to reassess and amend, this new request from your broker may be a little daunting and frustrating. To assist you with this process, we recommend visiting the ASIC Money Smart website, where you will find an entire section on managing your money: https://www.moneysmart.gov.au/managing-your-money/budgeting. There is also an app you can download, called TrackMySpend.
There is also more focus than ever before for all lenders and finance providers to be a lot more thorough on the assessment of your loan. When applying for finance, it is no longer unusual to be asked a lot more questions, and be required to provide much more documentation before a final decision can be made.
As always, if you require assistance in relation to any finance matter, please contact your trusted adviser.