Think you’ve got your finances sorted for that home loan application? Think again.
New research from Money.com.au reveals a hidden trap costing thousands of Australians their shot at homeownership, and it all comes down to one crucial, often overlooked detail: your daily spending.
According to the research, one in five homeowners drastically underestimated their living expenses when applying for a mortgage.
Within this group, 12 per cent said they unintentionally underestimated their expenses but a broker or lender flagged it and the loan still proceeded.
A smaller portion (8 per cent) had their home loan application rejected outright as a result of the error.
Some homeowners underestimated their monthly spending by more than $1000 – a shortfall large enough to push borrowers below the serviceability threshold.
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New research from Money.com.au reveals that one in five homeowners underestimated their living expenses when they applied for a mortgage, and for some it was enough to cost them the loan. Picture: Jeremy Piper
Debbie Hays, Money.com.au’s Mortgage Expert, warns that many Australians simply aren’t keeping a close enough eye on their finances.
“Most people don’t know how much they spend each month,” Hays states.
“More often than not, mortgage applicants will have an estimate of their living expenses, and when you go through their bank statements, you find glaring inconsistencies. You want to find those errors before you submit your loan application.”
Hays further emphasised the rigorous scrutiny applied by financial institutions.
“Lenders will scrutinise every line of your bank statements, so if the figures don’t match what you’ve declared, whether the mistake is accidental or intentional, it can derail your application or even lead to a rejection,” she said.
“This applies just as much to refinancing as it does to new loan applications, because they re-run the same serviceability checks every time.”
While the figures paint a stark picture for some, the majority of mortgage holders (69 per cent) did accurately estimate their living expenses.
Interestingly, 11 per cent even admitted to overstating their costs.
Young Aussies bear the brunt of budget blunders
The research also pinpointed a generational divide in financial accuracy.
Younger Australians were significantly more prone to underestimating their living expenses.
A substantial 62 per cent of Gen Z borrowers admitted to getting their figures wrong, compared to 33 per cent of Millennials, 19 per cent of Gen X, and a mere 8 per cent of Baby Boomers.
Some homeowners underestimated their monthly spending by more than $1000 – a shortfall large enough to push borrowers below the serviceability threshold.
The consequences for these younger demographics were also more severe.
Of those who underestimated their expenses, 32 per cent of Gen Z applicants had their home loan rejected, a stark contrast to 13 per cent of Millennials.
How banks assess your spending
Lenders employ the Household Expenditure Measure (HEM) to gauge your basic living costs, factoring in income, relationship status, and dependants.
This benchmark is then compared against your declared expenses and meticulously cross-referenced with three months’ worth of bank statements.
If your actual spending, as revealed by your bank statements, exceeds your declared figures, lenders will use the higher, real spending amount.
While this might still fall within the HEM benchmark in some cases, exceeding it can significantly reduce your borrowing capacity and potentially push you below the serviceability threshold, leading to a rejected application.
However, Hays notes that there are circumstances where low declared living expenses may be acceptable.
This includes if you are self-employed and legitimately run some personal costs through your business, possess high savings or a substantial income that clearly supports your lifestyle, or if your property holds a strong equity position, which mitigates the lender’s risk.
The message is clear: meticulous budgeting and an honest assessment of living expenses are paramount for any Australian looking to secure or refinance a home loan.
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