Understanding your living expenses
I have a client that I have been working with for the past 12 months to get her in a position whereby she can afford to buy a property after going through a divorce, selling the family home and having to move to another state. Not only was this an emotional time for her, but the stress of having to start again at the age of 60 made this process tough and stressful. She moved into rented accommodation whilst getting all her ducks in a row, but ultimately wanted to put her settlement money back into a property ASAP, start making a life for herself and put the past behind her.
To get the property she wanted, she would need to top up with a small mortgage, the repayments would be almost 50% of her current rent, so you would think it should be a walk in the park! From the outside looking in, affordability is evident.
However, the land of lending is not that simple. Since the APRA and ASIC reviews, then the Royal Commission, lenders have been encouraged to show more vigilance when it comes to client’s living expenses, you know – utility bills, petrol, food, recreation and entertainment etc – to the point where in some instances they will go through every line entry in your bank statements to work out what is a living expense, what is a one off expense and in some cases what are business expenses.
With this client, the lender wanted to include expenses in the bank statements that we had not included at the application stage as we did not see them as ongoing living expenses, in fact most of them were related to her business. This increased her expenses significantly and meant that the loan no longer serviced according to the lender.
But the pressure was now mounting. The client had found a property that she loved! She could see herself living there happily and had her heart set on it. Fortunately with a little help from my Business Development Manager at the bank, we were able to explain and mitigate the expenses, allowing the loan to service again and I am happy to say that as of yesterday, the loan was formally approved and I will be meeting with the client next week to sign her loan documents! She is over the moon and the relief when I told her the good news was almost palpable.
When I take on a client, we go on this journey together and I understand that there is a person / people at the end of this, a family trying to buy their next home, a divorcee trying to rebuild her life, a young couple full of excitement as they buy their first home; I felt her anguish during the application process.
If you can take one lesson from this story, that is if you are looking to get a mortgage, understand your living expenses and do a budget. You can find a budget planer on my website http://adam-baker.com/calculators/ Ask yourself some questions; What are you paying now? Are you paying too much? Are you being realistic in your estimations? What will your circumstances look line in the future when you have the property? Are your circumstances going to change in the next 24 months? At the end of the day, you need to be comfortable that once you have the loan that you can still afford to pay the mortgage and have a way of life without committing everything to paying down a mortgage, there is more to life than debt!