In a recent case between ASIC and Westpac Bank, Westpac was accused of relying on the Household Expenditure Measure (HEM) instead of completing an actual living expense budget when it came to assessing home loan applications.
The case was overturned by the Federal Court, due to the fact that applicants should be able to reduce their costs of living, should they need to, in order make the required payments on their home loan.
The judgment implicitly defines the “substantial hardship” that a borrower must not be forced into by the granting of a loan, as being at poverty level, rather than simply being a reduction of living standards.
“The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship,” Justice Perram concluded.
“With knowledge of the consumer’s declared living expenses, one may well be able to discern that a consumer will have to trim their sails if the loan proceeds. But there is arguably a conceptual gulf between a trimming of sails and poverty.”
The banks are still scrutinising living expenses as a measure to assessing loan affordability. Most banks are requesting 1 to 3 months’ worth of bank statements for everyday accounts and will question expenditure over what may be stated on the application. But this may prove more liberal than current servicing practices.
To prepare yourself before making any finance application, it may be prudent to review your expenditure through your statements, know where your money goes and identify any non-essential spending. This may result in a higher borrowing capacity.
There are several free budgeting apps and programs available if you want to map this for yourself and to get a good handle on your own budget. When making investment plans, it may be a good idea to see if there are some changes you can make in your current spending that will give you more control of your future financial position.