Cobblestone Financial

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In this article, we will talk about spending, saving, loan conduct and what the bank is looking for when they are assessing your loan application.

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Spending:

 

All banks use similar methods to assess how much a household is spending each month.  Basically, there are 2 considerations

1. – What you are actually spending.

2. – What similar families, in similar income ranges are spending (HEMS)

 

Lenders will look at these 2 figures and go off whichever is higher. Let's look at each more closely.

 

What you are actually spending.

Most brokers use 1 of 2 apps for collating bank statements to see how much you are spending and what you are spending your money on.

• Bankstatements.com.au

• Cashdeck.com.au

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Both of these apps require you to log into your account and bank statements will be sent to your broker showing spending over a 6-month period. The statements come with a breakdown of the categories of spending which is used to cross-check the expenses you have declared.

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The main categories of spending are as follows

• Rent

• Utilities

• Groceries

• Dining Out

• Insurance

• Telecommunications

• Subscription TV

• Education and Childcare

• Vehicles and Transport

• Personal Care

• Health

• Department Stores

• Retail

• Home Improvement

• Entertainment

• Gyms and other memberships

• Travel

• Pet Care

• Uncategorised Debits

 

There are additional sections included in the bank statements summary such as Wages, Centrelink, Liabilities and Responsible lending flags to highlight gambling (including lotto), overdrawn accounts and dishonours.

 

Your mortgage broker will have a conversation with you about any discrepancies between your bank statements and your declared spending. If you have made one-off purchases like appliances or furniture, these can be removed to reflect average monthly spending more accurately.

 

 

What similar families, in similar income ranges are spending

The second method Lenders look at is what we call the HEMS (Household Expenditure Measure).  HEMS is based off the results in the Australian Bureau of Statistics Household Expenditure Survey and compares families with the same number of adults and children on similar income levels.

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HEMS is broken down into the following categories:

Absolute basics -  like food, clothes, utilities, communication and transport costs

Discretionary basics - like entertainment, tobacco, alcohol, and eating out.

Non-basics -  more luxury items like overseas travel or home services like cleaners and gardeners

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There are additional items that fall outside of HEMS and need to be added on top of the HEMS household spending. These include Child Maintenance, Strata fees, Private School Fees, Private Health Insurance & Personal insurance held outside of superannuation such as Life/TPD or income protection.

 

The lender will use the higher of the 2 figures. If your actual spending is below HEMS, the HEMS figure will be applied. If your actual spending is higher than the HEMS, then they will use your actual spending to assess your application.

 

There are some instances where this figure can be argued such as a fly-in/fly-out applicant who may be on a high income but is only home 50% of the time and has all food and expenses paid for while at work.

 

Using a combination of both methods, your broker will be able to get an accurate snapshot of your spending habits per month and this is used to assist in working out how much you can borrow.

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Savings:

 

Savings are much less complicated.

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Lenders just want to see genuine savings held in your bank account over a 3-month period.

You may have savings progressively increasing as you credit funds to your account, or you might have received a lump sum by way of gift or inheritance with the balance remaining the same over the 3 months. It really does not matter. You can even withdraw from your savings account from time to time so long as at the end of the 3 months, you have the required amount showing as your balance.

There is a bit of confusion around using your rent payments as proof of genuine savings. Some people think if they are paying rent, then they don’t need a deposit but this is not the case. You still need to physically hold the deposit in your bank account. The rent you have paid does not replace the need for a deposit.

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An example where we can use this policy is if you received a lump sum payment like a tax refund or inheritance that is not viewed as genuine saving as you have not held it in your account for 3 months. If your rent over the last 6 months is equivalent to that amount, the lender will view your lump sum as being genuine savings by considering your rental payments as well.

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Another policy some lenders will consider is where a borrower has made accelerated payments on a loan to pay it out early such as a personal loan. These extra payments can also be used to argue genuine savings where a lump sum payment is being used.

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Loan Conduct:

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When you apply for a loan, the lender will ask to see bank statements for any loans that you have. Checking your statements enables us to see if you are making your repayments on time and allows them to assess the level of risk in lending to each individual.

Generally, we will collect 3-6 months' statements for any other home loans, credit cards or other personal debts.

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Keeping your loans in order is important when preparing to apply for a mortgage. If there are missed payments or overdue amounts the lender may decline your application as they view you as a higher risk. This is imperative where mortgage insurance is applicable.

Where your payment is over 1 month late, it will impact your credit file and will remain on your history for 2 years.

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Your mortgage broker will check your credit file before submitting your application to the bank to ensure it is clear. Check out the article on credit reporting for further information on credit reports see our Buyers Information page HERE

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