How spending affects borrowing Blog article
There is a common misconception that your borrowing capability is related solely to your income. However, it’s often the gap between what you earn and what you actually spend than determines how much the banks will lend you.
Unfortunately most people’s outgoings follow their increasing pay-packets, meaning the Mercedes driving director is often not much better off after expenses than the tram hopping junior members of their team - such is the cost of significant vehicle loans and unpaid credit card statements filled with tales of lavish dinners, expensive wines, five star travel and increasing interest fees.
In a time where many people’s lifestyles revolve around instant gratification, lenders are now taking a more responsible approach to lending and investigate genuine spending habits as well as factoring in possible future interest rate rises.
With a sense of irony, we now often see clients that are unable to refinance to a better deal and lower repayments at another bank because they no longer “service” under new lending criteria, despite not currently skipping a beat with repayments!
As lending specialists, we educate our clients on how loan servicing is calculated, and work closely with them to determine what they can comfortably borrow. We start every fact finding process with a living expense worksheet and encourage clients to download their last 3-6 months bank/credit card statements to get a true understanding of where their money really goes.
Non-essentials like daily coffees, afternoon snacks, takeaways, smashed avo brunches, haircuts, beauty treatments, Ubers, the odd parking fine, gifts, weekends away, weddings (side note, the average guest spends $650!) and other celebrations are often overlooked when considering how much is spent on top of the obvious like utility bills, rego and insurance.
Sure, you can claim “but once I get my own home I won’t do that anymore!” or “if I don’t have it I won’t spend it” but you must consider if you really want to give up everything, and how can the bank be sure you'll change if you haven’t demonstrated good spending behaviour leading up to applying for a loan?
Time to rein in your spending?
If you’re currently trying to save for a deposit, as a starting point complete this simple worksheet and see if there are ways you could tweak your day to day spending and escape the instant gratification trap, which is usually anything but gratifying in the long run!
Remember - It’s as much about behaviour as it is salary!