Living expenses for high-income earners are generally higher than they are for low and middle-income earners.
While household income is taken into account, each lender will apply different weightings and this can drastically affect your home loan borrowing power.
Will high living expenses stop me from getting a home loan?
No! Some lenders take a more common approach than others.
As long as you can show that you can afford the loan amount, you’ll have a good chance at approval.
Typically, you’ll need to provide:
- Your last two payslips and most recent group certificate to confirm your income.
- Alternatively, an accountants letters confirming your income (if you’re self-employed, although other low doc options are available).
- Your last 3 months bank statements and credit card statements (the latter, if applicable).
- Your most recent statement for any current debts you have including personal loans or car loans (if applicable).
We understand that professionals like doctors, accountants, lawyers and engineers tend to have high basic living costs and discretionary spending.
In some cases, completing a living expenses reduction declaration can improve your borrowing power drastically.
We can help good borrowers like you qualify for incredible home loan discounts so please call us on 1300 889 743 or fill in our online enquiry form to speak with a mortgage broker.
How lenders weight your income is the key to approval
Your household income already affects the way banks consider your living expenses.
What the lenders consider reasonable spending for your household type and income is partly based on the Household Expenditure Method (HEM).
For example, for a couple, each earning $80,000 per year, $3,060 in monthly spending is considered reasonable.
For a couple on a combined income of $400,000 per year, spending $4,040 per month is considered reasonable.
What makes the difference to your borrowing power is how much weight the bank will apply to your income when they assess your monthly expenditure.
A couple earning a combined income of $500,00 p.a. may find that living expenses are calculated as $50,000 with one and $80,000 with another. The difference can be huge!
In addition:
- The monthly spending that lenders consider reasonable caps out after a certain income level.
- Some lenders recognise that the cost of living is higher in affluent suburbs while others don’t.
- Those earning over $400,000 to $500,000 per year don’t fall under specific guidelines or lending policies when it comes to income weighting and living expenses.
It’s flavour of the month in terms of the bank’s risk appetite.
What’s the solution?
Call us and we can help you apply with the right lender!
Why do most high-income earners get declined?
Most high-income tend to better with their spending than those on lower incomes.
This is particularly true of professionals who completed education later in life and are used to living a basic lifestyle.
What catches a lot of high-income earners out is that their basic living expenses tend to be automatically more expensive. For example:
- Owning a nice home on a big block of land in an affluent suburb usually means your insurance, rates and everyday expenses like groceries and fuel are higher.
- You’ll spend more on life insurance and car insurance.
- Your education expenses are higher, particularly when it comes to private school fees for children.
- Spending on clothing and apparel tends to be higher, particularly if your job requires you to wear suits to meet with clients or wear personal protective equipment (PPE).
- Expenses related to retirement planning, particularly if you have a family trust or you’re a business owner with a self-managed superannuation fund (SMSF).
What if you have high debt?
We sometimes get enquiries from high-income earners that have a large amount of unsecured debt.
This is generally because it’s easier for these types of borrowers to qualify for credit cards, personal loans and car loans.
As long as you’re financial situation makes sense and you’re making your repayments comfortably, having unsecured debt won’t necessarily stop you from getting mortgage approval.
Where it can be an issue is if you’ve made a number of credit enquiries in a short time period or you’re behind on your payments.
Where it’s appropriate, you may be able to improve your borrowing power by paying down your unsecured debt or cutting unused credit card limits, for instance.
Having a poor repayment history can affect your chances at approval so a great solution is to set up autopay.
What's changed with assessing living expenses?
Up until 2017, banks relied heavily on the HEM as a benchmark for what is reasonable for monthly spending.
The benchmark varies depending on the number of adults or whether the borrower/s have dependent children. This then filters into four categories:
- Student.
- Basic.
- Moderate.
- Lavish.
After royal commission findings, banks were required to take more reasonable steps to determine borrowers’ actual living expenses.
In the past, they would simply take the higher of HEM and your declared living expenses which meant some borrowers may have been approved for loans they couldn’t completely afford.
While lenders have taken steps to make more thorough enquiries, your living expenses alone don’t really tell the full story of your borrowing power.
This means that living expenses for high-income earners are not always considered using common sense.
Refer to the home loan living expenses guide and try the living expenses calculator to find out where your borrowing power stands.
What additional expenses are included when calculating living expenses?
A major lender will also include the following additional expenses when calculating your monthly living expenses.
- Additional primary residence (e.g. strata, gardening, home help services, land tax)
- All secondary residences (e.g. a holiday home that is not rented out)
- Private education (e.g private school fees, tuition fees, books, materials and uniforms)
- Personal insurances
- Counselling
- Beauty treatments
- Overseas travel
- Recreational vehicles and insurances
These expenses are included as part of their responsible lending and regulatory obligations and to capture living expenses at a granular level.
By accurately capturing your monthly living expenses, the bank can provide an accurate figure of how much home loan you can afford.
Golden tips for living expenses for high-income earners
- Be honest in your living expenses declaration.
- You’ll have the opportunity to make a commitment to reasonably reduce your discretionary spending.
- Cancel unused credit cards and consider reducing unsecured debt before applying for a home loan.
- Save a 5-10% deposit through genuine savings or apply with a guarantor.
Discover if you qualify for a home loan
Are you a high-income earner with large living expenses?
Call us on 1300 889 743 or fill in our free assessment form today.
We’re experts in living expenses for high-income earners.