Improve your Serviceability by Managing Living Expenses and Household Expenditure

Hello there, future homeowners and property investors! If you're venturing into the realm of mortgage lending in Australia, you need to be well-versed in the concept of serviceability. One critical aspect that lenders scrutinize is your living expenses and household expenditure. These factors play a significant role in determining your mortgage eligibility and the terms you receive. Let's dive into the nitty-gritty of how living expenses impact your serviceability and what you can do to manage them effectively.

The Importance of Living Expenses and Household Expenditure

When lenders assess your mortgage application, they don’t just look at your income and debts. They also evaluate your living expenses and household expenditure to ensure that you have enough income to cover your daily necessities while still affording your mortgage repayments comfortably. These expenses encompass a wide range of categories, including groceries, utilities, transportation, childcare, and entertainment.

By evaluating these expenditures, lenders aim to gauge your overall financial health and your ability to manage your finances responsibly. A thorough understanding of your living expenses helps them determine your serviceability, which is a measure of your capacity to repay the loan without undue hardship.

Categories of Living Expenses

Living expenses can be broadly categorized into two types: essential expenses and discretionary expenses.

1. Essential Expenses

These are necessary expenditures required for day-to-day living. They include:

• Groceries: Daily food and household supplies.

• Utilities: Costs for electricity, gas, water, and other basic services.

• Rent or Mortgage Payments: Your current housing costs.

• Insurance Premiums: Health, car, home, and other necessary insurances.

• Transport Costs: Expenses for public transport, fuel, and car maintenance.

• Childcare or Education Expenses: Fees for daycare, school, or tuition.

2. Discretionary Expenses

These are non-essential expenditures that are optional. They include:

• Dining Out: Eating at restaurants or ordering takeout.

• Entertainment: Activities like movies, concerts, and subscriptions.

• Travel and Holidays: Expenses for vacations and trips.

• Shopping: Purchases of clothing, electronics, and other non-essential items.

Example: Calculating Living Expenses

Let's take a look at an example. Sarah, a prospective homebuyer from Perth, decides to create a budget to determine her monthly living expenses. She reviews her bank statements and receipts and categorizes her expenses as follows:

• Groceries: $500

• Utilities: $200

• Rent: $1,500

• Transport: $300

• Childcare: $800

• Dining Out: $300

• Entertainment: $200

Her total living expenses amount to $3,800 per month, encompassing both essential and discretionary expenses.

Verification of Living Expenses

Lenders require borrowers to provide evidence of their living expenses to verify the accuracy of the budget presented. This may involve submitting bank statements, utility bills, rental agreements, or other relevant documents that demonstrate your spending patterns.

Example: Providing Evidence of Living Expenses

John, a mortgage applicant, submits his bank statements for the past three months to his lender. The statements show regular transactions for groceries, utilities, rent, and childcare, providing evidence of his living expenses. The lender reviews these documents to assess John's ability to manage his finances responsibly and afford mortgage repayments.

Impact of Living Expenses on Serviceability

Living expenses directly impact your serviceability by reducing the amount of disposable income available for mortgage repayments. Lenders calculate your debt-to-income (DTI) ratio by deducting total living expenses from your gross income before determining loan eligibility and affordability.

Example: Impact of Living Expenses on Serviceability

Lisa, a mortgage applicant, has a gross monthly income of $6,000. After deducting her living expenses of $4,000 per month, her disposable income available for mortgage repayments is $2,000. This reduced disposable income affects her DTI ratio and may influence the loan amount she qualifies for.

Strategies for Managing Living Expenses

Managing living expenses effectively is crucial for improving your serviceability and maximizing your borrowing capacity. Here are some strategies you can adopt:

1. Budgeting

Create a detailed budget that outlines your income and expenses. This can help you identify areas where spending can be reduced or optimized. A budget acts as a financial roadmap, guiding you towards your goals while ensuring you don’t overspend.

2. Expense Tracking

Monitor your daily expenditures and identify unnecessary or excessive spending habits. Use tools like budgeting apps or spreadsheets to track your spending and analyze your financial behavior. This can lead to cost-saving opportunities and more mindful spending.

3. Negotiating Bills

Negotiate lower rates for utilities, insurance premiums, and other recurring expenses. Many service providers offer discounts or lower rates if you ask, especially if you’ve been a loyal customer or can demonstrate financial hardship.

4. Cutting Discretionary Spending

Limit discretionary spending on non-essential items or entertainment. Redirect these funds towards savings or debt reduction. Small sacrifices, like cooking at home instead of dining out, can accumulate into significant savings over time.

Example: Implementing Expense Tracking

Tom and Emily, a couple saving for a down payment on a home, decide to track their expenses for a month to identify areas where they can cut back. They use a budgeting app to categorize their spending and analyze the results. By identifying unnecessary expenditures on dining out and entertainment, they are able to reallocate those funds towards their savings goal.

Conclusion

Living expenses and household expenditure play a crucial role in the mortgage assessment process in Australia. By understanding the impact of these expenses on serviceability and implementing effective strategies to manage them, you can improve your financial health, qualify for larger loan amounts, and secure favorable mortgage terms.

Remember, the journey to homeownership or expanding your property portfolio is a marathon, not a sprint. Stay informed, plan strategically, and don’t hesitate to seek professional advice when needed. As your trusted mortgage broker, I'm here to guide you every step of the way. Reach out today for personalized advice and support tailored to your unique financial situation.

Stay tuned for our next blog in this series, where we’ll explore another key aspect of serviceability in Australian mortgage lending. Happy investing!