The particular area of household living budgets has been in the spotlight for the Government regulator (APRA) & lending institutions for some time now.
There is a particular reason for this because it impacts on the level of a consumer’s borrowing capacity. It became an area of concern for the Australian finance regulator because of the gradual downward movement of interest rates in Australia since the GFC in 2007 & is coupled with another element which I will mention now. As interest rates fell, the Government became wary of home loan borrowers overextending themselves with debt because bank’s could lend them greater amounts based on the lower interest rate plus a small static margin of say 1.5% to 2%. So to stem this issue the Government introduced a prudential guideline floor rate of 7.25% which is used to ensure a solid ‘stress’ factor is built in when a consumer looks to borrow.
“They might borrow at 4% but that ‘stress’ rate is where they have to prove on paper, the ability to service a home loan.”
Now, turning to the ‘household living budget’. This is the second element that is now being monitored very closely. A borrower must complete one of these budgets for a lender whenever they are reviewing a loan, or borrowing more. The budget should be completed by the borrower in their hand & executed & dated accordingly. This budget covers all the usual daily living costs under the standard categories of:-
· groceries / food
· medical
· utilities
· transport
· education
· home related rates / insurances/rent/repairs etc.
· entertainment, clothing, grooming etc.
Debt repayment costs are not included in these living budgets. Of course a living budget can vary dramatically from one borrower’s position to the next, so the historically used indexes that the lenders considered when assessing these expenses eg. (H.P.I.) Henderson Poverty Index, have become redundant or more to the point, unacceptable. The lenders scrutinize each of these categories very carefully once the borrower has completed them & the loan submitted. Now an additional recent increased focus within the living budget has been on the area of property rates, insurances & associated utilities. If a borrower happens to own their home & say another three residential properties, they MUST declare all outgoings relating to ALL four properties. Rather than say having $5000 as an example of total annual property outgoings for the family home, that becomes $20000 or more after including these extra properties! This significantly increases a living budget expense position. On the other side of the ledger, the income from those investment properties is still assessed at a reduced sensitized percentage of say 70% to 80% on average.
In summary the increased focus on living budgets & the higher percentage of 7.25% used as a prudential guideline loan servicing rate, has meant a significant ‘on paper’ reduction in any consumers borrowing capacity.
As you can see from the above, it’s extremely important that the information completed is accurate!