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? 

The LIXI standard  

Many lenders are changing the way they categorise certain living expenses, by not only using the HEM but also something known as the LIXI standard.

Previously, all living expenses fell inside the HEM; now, there are some categories that fall outside. Some of those ‘outside’ categories include:

• Strata and body corporate fees

• Private schooling and tuition fees

• Investment property expenses

• Insurance

The way lenders now assess insurance is a good example of the new environment.

Before the introduction of LIXI, all insurances were lumped together into a big ‘insurance’ category within the HEM. Now, insurances are grouped into two more refined categories outside the HEM:

• Car insurance and home insurance are categorised as ‘general insurance’

• Health insurance and life insurance are categorised as ‘personal insurance’

Why does this matter? 

The reason the move to LIXI matters is 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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