How Your Expenses Impact Loan Eligibility

Securing a loan is not just about having a large enough deposit; it also involves a meticulous examination of your expenses. Banks look into your financial commitments and spending patterns, examining credit cards, store cards, loans, overdrafts, monthly bills and more.

Banks typically look at an average of three to six months of statements to gauge where and how you spend your money. This process helps them to understand your financial commitments and assess how much you can allocate towards mortgage payments.

We asked Aseem Agarwal, Head of Mortgages at Global Finance in New Zealand, about some of the ways in which personal and financial expenses can influence loan eligibility.

Understanding living expenses

“Your loan eligibility is directly impacted by your living expenses. Obviously, the higher your living expenses, the less you will be left with to commit towards the mortgage repayments ” explains Aseem.

Living expenses, also known as personal expenses, encompass day-to-day costs. These are categorised into essential and discretionary expenses.

Essential expenses include utilities such as gas, power, phone, and water, as well as groceries, and fuel. Discretionary expenses involve childcare, insurances, rates, entertainment spending, subscriptions, donations, loans such as vehicle, personal or family loans, personal or business overdrafts, or financial commitments such as sending money overseas to family.

Essential vs. discretionary expenses

Essential expenses are non-negotiable. Discretionary expenses, on the other hand, are optional. Banks scrutinise both categories before approving a home loan.

Financial commitments

The key question banks ask is whether you can maintain these commitments while servicing the new loan. Aseem provides valuable advice:

“Repayments towards existing loans are considered. If you’re willing to adjust or settle certain financial commitments, it may positively impact your loan eligibility.”

Submitting a loan application yourself

The issue, Aseem explained, is that prospective home buyers often don’t know how the banks will treat each expense and how certain permutations and combinations of expenses will directly affect how much they can borrow. “It’s very hard for them to gauge before or when they are applying what they will be eligible for.”

If you have been turned down for a mortgage already, there is more to this process than simply going through your expenses and then randomly cutting some discretionary spending.
“That’s where the advantage of a broker or advisor such as global finance comes in”.

The role of brokers on loan eligibility

For individuals lacking financial expertise, analysing the effect of various expenses on a loan application can be challenging. Aseem tells us that when mortgage applicants go directly to the bank and hand over all their bank statements and various bills and documents, they assume the bank will advise them. There is an assumption that the bank will tell them that if they cut this or cancel that subscription, then they will be able to successfully take out the loan.

But that’s not the case.

Banks look to the customer to tell them what they are willing to do. They want to know what compromises or sacrifices prospective borrowers are willing to make to put them in a more comfortable financial position.

Brokers, like Global Finance, understand the ins and outs of each bank’s affordability calculations. Because they are dealing with multiple banks, they know exactly how each bank treats expenses. Utilising an affordability calculator from each bank, they can assess clients’ eligibility before applying on their behalf.

“We assess what adjustments or compromises a customer needs to make. This upfront commitment sets a positive tone for the bank, indicating the customer’s financial awareness.”

Customer empowerment

Working with a broker puts clients one step ahead of those who may be applying to a bank directly.

Aseem emphasises how their proactive dialogue with clients helps with the loan application process. “We can educate clients about the compromises, sacrifices, or adjustments needed for mortgage approval and we can discuss what they need to be prepared to do in advance.”

Mortgage brokers equip borrowers with a pre-emptive understanding of any changes needed. They can prevent clients from being blindsided; something that often occurs when individuals apply directly to the bank.

“Customers need to understand banks’ expectations. When dealing with brokers, they get a clear picture upfront, enabling them to prepare for potential adjustments. This is a significant difference compared to dealing directly with the bank.”

When presenting or submitting the case to the bank for their clients, Aseem tells us, their brokers can write the necessary adjustments or compromises into the application in advance based on their discussions with the customers. They can demonstrate that their client understands what changes would have to take place to their spending patterns. They can show a level of commitment and provide the bank with a positive indication that the customer understands their financial obligations and that they are prepared to make the necessary sacrifices to become eligible for a home loan.

The impact of expenses on loan eligibility is not straightforward

Fortunately, mortgage brokers, such as those at Global Finance, can put you in a much better position before you apply for a mortgage. They can guide you through the maze of bank procedures, provide foresight on potential hurdles and help you understand where adjustments are necessary.

If you’re looking to apply for a home loan, get in touch with our brokers either by emailing info@globalfinance.co.nz or calling 09 255 5500. The Global Finance team can streamline the home loan application process, making it less daunting and bringing you one step closer to moving into your new home.

The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.