For the times they are a changing.
Bob Dylan must have been prophetic as things certainly are a changing in the finance industry on an almost daily basis. Pressure from the Royal Commission and government agencies ASIC & APRA have seen the banks tighten up their guidelines considerably especially in the assessment of living expenses. In the past, banks simply relied on a generic calculation called Household Expenditure Measure (HEM) which determined average living expenses based on how many adults/children lived in the household. However, banks have now changed their criteria with some of them having as many as 13 different living expense categories. They now require copious amounts of information including the latest statement on your everyday savings account and credit cards as well as any other loans you may have. Literally that coffee in your hand, the shirt on your back, the cost of that hot date at a restaurant, the cost of sending your kids to school are all taken into consideration to calculate your monthly living expenses.
Why is this so important? The aim is to encourage banks, brokers and borrowers to have more detailed conversations to better understand each clients’ unique set of circumstances. This will help both the broker and the lender to more accurately assess a borrower’s lending capacity and ensure that the loan being offered meets the clients’ needs and is in accordance with strict responsible lending guidelines. This will avoid people being put into loans they can’t afford due to living expenses being underestimated.
So how does this affect you? Be mindful of the fact that next time you need to borrow money, the loan assessment process will take longer and be far more onerous. You will be required to provide comprehensive documentation confirming your living expenses and demonstrating exemplary conduct on your existing credit facilities. Late payments even for a few days or exceeding approved credit card limits even by a few dollars will be frowned upon and you may well be told to keep your credit nose clean for 3 months before you are able to re-apply again.
Be aware, that this increased scrutiny will result in a reduced borrowing capacity because the banks have now ramped up their default living expense calculations whereby they will work with either their figure or client estimate whichever is greater. So how much you may have been able to borrow even 6 months ago will now be significantly less even if nothing else has changed. I challenge you to track your spending for a month to see where all your hard earned money is actually going. I guarantee you will be surprised at the results. Suddenly that uber eats order or afterpay transaction for new clothes may not be a great idea. Go ahead, I dare you.