The way lenders calculate your living expenses is changing
When you apply for a home loan, the lender will want to know how much you spend each month on living expenses such as food, transport, insurance and entertainment.
Not because the lender is being nosy. But because:
It’s a legal requirement under the National Consumer Credit Protection Act 2009
The lender is being prudent and wants to make sure you can afford to repay the loan
These laws are known as responsible legal obligations and mean your lender must take into account your average monthly living expenses when determining how much you can afford to borrow.
How do lenders calculate your living expenses?
The way lenders assess your living expenses frequently changes.
For example, in 2017, investment banking giant UBS estimated up to 80% of Australian home loans were approved using the household expenditure measure (HEM).
The HEM is a benchmark that estimates how much someone in your location is likely to spend based on several factors, including your income, family size and lifestyle.
However, the problem with benchmarks is they aren’t always an accurate reflection of an individual’s situation. So lenders also:
Ask you to self-declare your expenditure (and verify this data more closely than they used to)
Accept whichever number is higher – the HEM benchmark or your personal result
So what’s changing now?
Many lenders are now categorising living expenses in more detail.
This means some costs, like strata fees, private school tuition or certain types of insurance, may be assessed separately, rather than being grouped into broader expense categories.
These changes are supported by the LIXI data standard, which helps lenders exchange financial information more efficiently. But to be clear: LIXI doesn’t set lending rules or determine how your expenses are assessed. That’s up to individual lenders and regulators.
Why does this matter?
This shift toward more detailed categorisation of expenses matters because it may affect how much you can borrow.
At least six months before you apply for a loan, it's important you start keeping a detailed record of all your expenses. That way, lenders can calculate your borrowing power accurately. If you don't have a proper grasp of your expenses, you might overstate expenses that fall outside the HEM (such as personal insurance), which would reduce your borrowing power.
As an added bonus, keeping a close eye on your living expenses will also help you identify any areas where you can save money.
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About the author - Alex Veljancevski is a Sydney mortgage broker with Eventus Financial, which assists first home buyers, investors, upgraders and borrowers seeking a better deal on their home loan.