This article is the second of a series that dives into the mind of the bank. Many Kiwis go to their bank to get a mortgage, without realising the bank is looking after their own interests and aren’t concerned with their wealth plan or that buying a house is a gateway to financial freedom.
When you get a decline from the bank, they usually won’t tell you why or help you address any roadblocks. That’s where we come in.
Make sure you read article: Why Was my Mortgage Application Rejected: Test Interest Rates
One of the reasons your mortgage application might have been denied is due to benchmark lifestyle expenses.
When you declare your expenses in your application, even if they’re accurate, the bank will increase them, if they are lower than their minimum amount for that expense.
What are benchmark lifestyle expenses?
Lenders have an estimate for expenses that they believe is the average for any family situation, whether single, a couple, or with dependents. They’ll use this to determine if you’re able to afford the mortgage you’re applying for, if your declared expenses seem unrealistically low to them. For example, let’s say you are getting ready to buy a house and you’ve been watching your money closely. You’ve lowered your food expenses to $500 a month and have been very diligently following a strict budget.
The bank will look at the $500 a month in food expenses and decide that it’s not likely for a family your size to continue to spend such a low amount on food in the future. In this case, they’ll use their benchmark lifestyle expense, which might be $750 a month, instead.
What happens if my expenses are higher than the benchmark lifestyle expenses?
If your declared expenses are higher than the bank’s benchmarks, the bank will use your higher expenses to determine if you can afford the mortgage.
Remember, the bank is trying to manage the risk involved with giving you a loan, so they’ll always be considering the worst-case scenario.
How do benchmark living expenses affect my mortgage application?
In the situation where your servicing is tight and you only qualify for the mortgage you need using your lower expenses, you’ll likely get a denial from the bank.
However, if the bank has used their benchmark lifestyle expenses and you get a slim pass, the bank may start to comb through your bank statements to see if there are any other red flags, resulting in further inquiry into your situation.
How to get around benchmark lifestyle expenses?
While there’s no way to eliminate the bank’s benchmark expenses from your mortgage application, you can prepare for them.
Three to six months from when you want to apply for a mortgage, review your living expenses with a mortgage adviser who can put your expenses into a servicing calculator for multiple banks that will consider their benchmark expenses.
Your mortgage adviser will be able to see whether you’re likely to get an approval or denial based on your expenses. If it looks like you might not pass, a Futurebound mortgage adviser will work with you on strategies to get your expenses looking better to the bank.
Keep in mind this article provides general information and not individual financial advice.
If you’d like a review of your mortgage situation and customized advice for building wealth to reach mortgage and financial freedom, please book a free 15-min chat.