There has been a lot of talk about living expenses in the media of late largely due to the Royal Commission focusing on the way mortgage brokers and banks assess the suitability of the loan for a borrower.
Some banks and brokers were not paying enough attention to the borrower’s actual living expenses. Living expenses include but are not limited to:
|· Food and non-alcoholic beverages|
|· Alcohol and tobacco|
|· Clothing and footwear|
|· Furnishings, household equipment and services|
|· Recreation and culture|
|· Insurance and financial services|
Historically, lenders would just ask one number “How much do you spend per month?”.
Which is fine if as a borrower you use a budget tracking tool or a spreadsheet to manage your expenses but most people don’t. Typically what I found is that if you ask someone what they spend total in one month, they underestimate. Not deliberately but just because they usually forgot about different line items. At Orange Mortgage and Finance Brokers, we have been using a detailed budget sheet which lists over 80 different line items which helps people breakdown exactly what they spend each month or year.
Because we have spent a decent amount of time on our online platform and also tried to align it to “industry standard” we now use a 13 line item budget via the Orange Online Fact-Find.
How to budget?
If you don’t really know how much you spend, there are a number of different options/planners which will help you breakdown your spending habits:
- Budget Planners – ASIC which is one of the government’s regulator has a nice MoneySmart website with a whole range of different topics. They have a simple budget planner which can be found here https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner. We still think this is a little light but a good start nonetheless.
- Budget/Spending tracking apps. Again, ASICs MoneySmart has created an app call TrackMySPEND https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mobile-apps/trackmyspend which isn’t bad but you pretty much have to type in each time you spend something so realistically you probably won’t do this for more than a week or so. It’s a free app and worthwhile trying.
- Go through your bank statements. Considering most people are moving away from paying cash for anything and simply using PayPass or swiping with their credit card, most (if not all) payments should be listed on bank and credit card statements. Take the last 3 months and go through each line item and allocate it an expense line like groceries, transport etc.
Budget for the future
Now that you have a good idea how much you are spending, you should also add things you aren’t currently paying for which you will be in the future. For example, if you are renting and you are looking to buy a new property, you are likely to have the following additional costs:
|Examples||Starting point per month|
Of course, the above is dependent on the type, size and value of the property but if you are a first home buyer in WA buying a house for $430,000 or under, then the above Council Rates, Water Rates and Gas Rate/Supply would be a good starting point. You can always call the council to ask what your rates will be?
How much can you borrow?
Now that you have an accurate picture on your living expenses, we can make a good estimate of your borrowing potential for the bank. If your expenses are lower than the figure the bank uses (Household Expenditure Measure) the bank will:
- Use the higher of a) your living expense estimate and b) the Household Expenditure Measure
- Can ask for 3 months bank statements on all transactional account to confirm your spending. More and more lenders are doing this.
I think with technology, the banks will easily be able to get a complete picture of your spending habits and they will probably look what you have been spending over the last 6-12 months. Mortgage brokers already have access to the technology which allows clients to download their bank statements over the last 6 months and then it itemises into the difference categories what spending has been on. This makes everyone’s life easier because its saves you and I from going through bank statements and adding each line up and also it will give you a complete picture of your spending habits. If you have been spending too much, it will be clear what on and you can change your spending habits to save more which again is more of a benefit if you are looking for a house.