Banks are clamping down on investors from every angle, with ‘living expenses’ one of the latest factors to draw attention.
So how can you maximise your borrowing power, when every little expense is under the spotlight?
Ten years ago, getting an investment loan was far easier than today. We’ve gone from one extreme to the other, with banks who were previously happy to hand over 100% loans in the past, now fastidiously checking every minor detail before signing an approval.
These checks and balances are an essential part of a healthy banking system as they help investors to avoid over-committing financially. So although many would prefer a return to a more relaxed servicing criteria, this is actually a preferable situation.
That said, we are continually surprised at just how far banks are going when adopting this cautious approach. Since APRA and ASIC intervened, lenders have raised the bar when screening applicants – and currently, it is living expenses they are focused on.
Living costs vs lifestyle costs
In the past, banks have used HEM (Household Expenditure Measure) tables to account for an applicant’s living expenses. Now, they are using the greater figure between expenses declared by the applicant, and the HEM tables.
The new challenge is that some lenders are starting to include items that, in our view, should be classed as discretionary spending, rather than living expenses.
Living expenses are routine bills that can’t be avoided; groceries, petrol electricity and the like. Discretionary spending covers items that we choose to pay for, but that can be stopped at will; take charity donations and restaurant visits for example.
Lenders are grouping a range of discretionary lifestyle items under ‘living expenses’, including:
Some lenders are going even further by asking for everyday bank account statements, so they can check salary credits and review daily expenditure.
What is the solution?
Our advice to home owners & investors who are shopping for a loan is to do some ground work well before you intend to apply.
It’s unwise to front up to a bank or lender and apply for a loan without due preparation. Unless you earn a high income that allows you to move past the banks’ increasingly stringent criteria and tests, you need to get your financial ducks in a row at least 3-4 months before you wish to apply.
Be aware of your daily expenses and if some are excessive, then you may have to rein them in. It could mean bringing your own lunch to work more frequently, cutting down on alcohol and smoking and even reducing eating out or holiday spending. At the end of the day it depends how badly you want to invest in your next property if your servicing is borderline.
Reviewing your discretionary spending as a routine is a good practice anyway, but it’s particularly important if you’re about to purchase a property. Any savings can make the difference between getting into your first (or next) investment property or not. In addition, these savings can be used towards your deposit or other property buying expenses, so keeping a lid on excess spending can only be beneficial.