Living Expenses Verification - FAQs
Distinguishing Discretionary from Essential Living Expenses when identifying an applicant’s Household Living Expenses:
Expenses that are situationally variable can be considered discretionary (i.e. holidays & travel) ‘one off’ luxury items (jet ski, trail bike, fine dining)
Discretionary expenses should be assessed per situation and the conversation with the applicant documented for the file.
Discretionary expenses are generally non-fundamental to daily living in every case they are usually matters of personal choice.
As a broker, you need to discuss household living expenses with the client regarding the accepted LIXI industry standard (refer to Mercury Needs Analysis) and document the outcomes in a memo or note
Quality of the note is vital. After discussion with the applicant, document by way of a file note and email to the client with ‘lead in’ comments such as “as we discussed…...”
When considering discretionary from essential living expenses, ask the question” is the client willing to forgo those expenses or cut back on those expenses?”
In most cases, applicant’s will make sacrifices in their discretionary spending if this means they obtain their dream home. The important thing for our members is to have the conversation and document it.
Terminology varies from lender to lender. Some require two categories (i.e. Discretionary & Essential) some require totals only; some require six categories & some 13. Members must comply with specific lender requirements when categorising living expenses in AOL & lender software. Regardless of this, however, Connective credit representatives must collect living expenses in accordance with the Mercury Needs Analysis.
Do I need to Document an Applicant’s current or future living expenses?
- Only Current Living Expenses (i.e. the position at the interview, not post-settlement) should be completed in your documentation or the needs analysis for Connective credit representatives.
- Future Living Expenses (i.e. new/additional living expenses post-settlement) should be identified by the broker in conjunction with the applicant and recorded in a note along with any of the current expenses that will remain after settlement (any current expenses that will not be relevant post settlement should be ignored at this point. Such as rental income if a client is paying rent/board and purchasing an owner-occupied property – refer to additional noted below). The combination of both categories will constitute what should be referred to as the ‘Post Settlement’ Household Living Expenses’
- Your notes containing the assessed & verified ‘Post Settlement’ Living expenses MUST be saved (in Mercury - Connective Credit Representatives only) along with a copy of the completed needs analysis and fact find documents. Depending on the lender’s policies, the total of the post-settlement living expenses must be entered into AOL, the lenders servicing calculators and Connective’s Borrowing Capacity Calculator.
- Conversely – if a client has currently included an overseas holiday and this will be removed when the client purchases a home (i.e. discretionary spending) this is where conversations and documentation become essential to supporting the figure used in servicing
- Clients who are First Home Owners and currently renting, you would not include future rental post-settlement.
Your client may not be aware of all utilities and rates. Therefore you need to ensure a conversation is held with the client, documented and the living expense you use for servicing inclusive of these amounts.
- Where there is a ‘Set or Pre-Determined Future’ situation (i.e. retirement planning - generally consists of known/planned income & expenses and therefore these expenses should be taken into consideration as post-settlement living expenses.
- Applicant’s planning a family in a ‘couple of years’ is considered outside of the scope of what is reasonably foreseeable and are not assessable as current or post-settlement living expenses. (Reasonably foreseeable is generally considered as within a 6-12 months’ timeframe)
HEM v Lender amount – why do lenders use higher of the two
- As part of their final assessment, lenders assess the client identified living expense figure loaded into AOL against their HEM threshold and apply the higher of the two to servicing calculations to ensure NCCP Responsible Lending (Not Unsuitable) obligations are complied with and without substantial hardship.
How do you verify CILE?
- Obtain bank statements/credit card statements and any other independent sources you can obtain such as rates or utility notices
There are programs available which will add up the living expenses of the client such as bankstatements.com.au / Cashdeck / Mogo. These are subscription services which you can sign up to.
Cross check the results of your additions to the client declared figure and ascertain if the figure provided by the client If there is a discrepancy, always document this and where required, have a conversation with the client.
- Make notes!
Self-employed clients who run expenses through the business
- If you assess the business income, you need to allow for any Household Living Expenses that may be paid by business income (i.e. living expenses paid by the business should not be included in an applicant’s CILE. Brokers & applicants may need to apportion some expense categories according to the % of personal / business use)
How do you make a client aware of their spending?
- Use the lead time! Between making the appointment and physically speaking with your client, ask your client to review just a week’s worth of their transactions.
- Ask the client to reconcile their credit card/transaction statement on living expenses and then extrapolate this over a month. Remember though – a week’s worth of transactions may not include bills paid that month, or that quarter, so a little bit of research is required by the client.
- Ask them to annualise these figures to give them an idea of what they are spending monthly, quarterly and annually
- Look at past bills – phone, water, electricity etc.
- Remember, it’s your role to educate their clients as well as arranging their credit
Can I obtain copies of lender’s HEM Tables?
- In short, No!
- The Household Expenditure Measure is produced by the Melbourne Institute (a division of the University of Melbourne) and is used by government agencies and lenders in analysing statistical data. The Institute sources a variety of data to produce the HEM data on an annual basis and provides benchmark expenditure data applicable to a variety of borrower categories according to income, postcode listing, age, net assets, etc.
- Due to the analysis conducted by the Melbourne Institute, the HEM figures (or a variation of this) have been adopted by lenders as a standardised benchmark for ascertaining living expenses and is therefore used in the serviceability of home loan applications.
- Lenders don’t publish their HEM tables as they each use their variation of the Institute’s measures and customise their HEM tables to suit their risk appetite and consideration to the NCCP Act’s Responsible Lending’ requirements.