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Understanding how living expenses are calculated could help increase your borrowing power.

Assessing living expenses is one of the many ways lenders gauge whether you have the capacity to service and repay your loan. It’s a complex equation of many different parts and impacts every borrower looking to submit a mortgage application.

If you’re preparing to take out a loan, it’s a good idea to get a handle on how banks calculate living expenses, as it directly impacts your borrowing power.

How does the living expenses calculator work?

The living expenses calculator uses family size, location and lifestyle to estimate a potential borrower’s living expenses based on categorised Household Expenditure Measures (HEM).

The living expenses spreadsheets and calculators take all basic living expenses into accounts like groceries, utilities, phone, public transport/car and entertainment. The cost of renting or mortgage repayments is calculated separately so you can replace the figure with your own estimate after you decide where you’d like to live.

The cost of living can vary significantly depending on your lifestyle. Interestingly, recent years have seen the net surplus per month of many potential applicants decrease dramatically because of the continuous rise in our cost of living. As a result, many prospective borrowers aren’t able to meet servicing requirements.

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What’s driving up our cost of living?

The cost of living in Australia — and particularly in inner cities — has become significantly higher than most other developed countries around the world. If you live in Sydney or Melbourne, you’re living in the most expensive cities in Australia. Perth and Canberra are also relatively expensive, while people living in other capital cities such as Brisbane and Adelaide actually have some of the lowest living expenses in Australia; while still enjoying relatively high salaries.

There are also a number of other products and lifestyle components that continue to rise in price, while our salaries have remained much the same. These include:

  • Housing (rent and house prices)
  • Alcohol
  • Tobacco
  • Petrol
  • Road tolls and car expenses

These factors combined are negatively affecting Australians’ borrowing power, making it more difficult to remain in the ‘positive’ zone of the HEM.

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Why do lenders calculate living expenses in this way?

Under the National Consumer Credit Protection Act, Australian banks must make allowances for living costs when they run borrowing power or serviceability assessments for applicants. This goes above any debts or liabilities they have. But banks don’t just rely on the HEM to assess your living expenses, they also use their own measures, adding a buffer based on their own risk appetite.

If you need help getting your living expenses under control to find a better home loan rate, see what Joust has to offer.