Borrowing money is always about income and expenses. I know that’s pretty obvious, but lately there is a move towards delving into those expenses a bit more closely.
Without a doubt there is a growing requirement from Lenders for more information. While that’s nothing to be concerned about on face value, you may be surprised when you find out what it is they want to know.
Let’s put it into perspective first.
All Lenders, and indeed anyone providing Credit advice, are obliged to make sure customers are not put under hardship. The Lender, and Mortgage Broker, are obliged to make reasonable enquiries to verify your financial position in determining whether they can assist in providing a loan product. That’s a complicated way to say they have to make sure you can afford it. This is particularly necessary in the preliminary discussion period.
By the way, this is not some whimsical excuse to make borrowing harder, but a requirement that sits at the heart of the National Consumer Credit Protection Act (NCCP) introduced back in 2010.
The Legislation was introduced to protect the customer from being put into a position of hardship when entering into a loan agreement. The onus is on the Credit Provider and by default, the broker, to provide a written recommendation for the client to consider but only after verifying the person’s financial position.
The requirement to verify your position applies to everything you own and anything you owe. That covers all of your Assets, Liabilities, Income and Commitments. On the plus side, most things are easy to verify. There are Payslips for income, statements for savings accounts, loan statements for debts etc.
The one thing that is difficult to pin down is living expenses. In the past, this figure used to be set arbitrarily by each Lender as they saw fit and it was locked into their servicing calculators. The introduction of NCCP Legislation has meant that the Living Expense figure was going to have to be verified eventually.
So, moving forward, you can expect to have far more detailed discussions with your banker and your Broker when you want finance.
By that I mean there will be questions asked around living expenses in general. For example NAB and ANZ are already asking how much is allocated to Food and Grocery shopping, to entertainment, to medical care, to clothing and Personal Care, holidays etc. The list goes on. They don’t want proof of what you spend but they do want to know.
While some may see this as intrusive there are benefits to be gained through a better understanding of your spending habits. Combining this understanding with a Budget can set your finances up for maximum efficiency.
Remember, a lender doesn’t care what you had for breakfast but they really care about how much you spend against how much you earn. More precisely, they care about how much MORE you spend than they think you should. It’s that income and expenses relationship that determines how much money you can borrow at any given time and managing your expenses is sometimes just as important as having more income.
In essence, Lenders are looking for clients that have expenses higher than the system generated amounts. Naturally, the higher the figure the more impact it will have on borrowing. Conversely, even if the customer’s expenses are shown to be lower, the Bank default amount will prevail anyway.
Providing credit advice is about the obligation to ensure that a client is not worse off than before the advice. Asking questions around personal living expenses is simply measuring that variable factor.
The best method for measuring that is a budget because at its most simple, a budget is primarily about identifying the areas where money is being spent. Realistically, you should know where your money is going regardless of whether you need to apply for finance or not.
Do you think it would be helpful to know where your money went every month?
Most people have an understanding of how much they can afford to pay and there is usually a vague idea of how much “feels” comfortable but they don’t really know what is affordable.
Imagine if you had a system in place that could track your spending and group it into categories so you had records of where your money went? Something as simple as that could make answering the Living expense question very simple indeed. As an added bonus you have the knowledge and control over your money flow.
In fact, if you started making savings from a budget it’s would almost be like getting a pay increase. Who would knock back an increase in pay?
In the end, it’s your responsibility to live within your means and equally it’s the Lenders obligation to make sure they don’t put you into a financial position you can’t afford. Knowing how you manage your money by asking about your expenses makes perfect sense.