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 Written by- Avjeet Gill (Avi) 5 Min read. 18 Sep 2018 www.redtiemortgages.com.au www.avjeetgill.com 0403 706 910 |
It is a common occurrence in every home, where parents can be heard telling their kids learn how to save, control your expenses and teach yourself not to spend on unnecessary things. Our parents know how important saving is as they have been through the same circumstances when they were young, when they bought their first home.
In a world where technology is changing by the minute, not days or weeks, don’t you think we need to keep up? A good lifestyle is what we work so hard for and look forward to and is important but learning to spend wisely and save is equally as important and more so.
Your future of home ownership is at stake.
It is being defined by:
- where you go for holidays?
- how many parties you attend?
- are you a frequent visitor to liquor store and so many other related things? It might not seem an issue today.
But this discussion begs yet another question. Why not, if I can afford it?
Off course, no one is judging anyone here. If you can afford it, please by all means go ahead. But what if you are just doing clearly out of habit, then you might have to think again. Affordability does not mean you can buy things without considering their use-ability and benefit.
Why is home ownership important?
Home ownership gives you freedom, peace of mind and independence. House prices go up, so you can use the equity in your house to increase your wealth further.
Remember renting or boarding is totally different from House ownership. By renting you are just paying someone else’s mortgages not yours. And when you are going to stop paying someone else’s mortgage and decide to get finance for your own home you might find, it’s not as easy as it seems. Knowing the process is helpful but understanding it is most important.
Knowledge vs Understanding
Knowledge and understanding are two different things but gravely misunderstood. There is a thin line separating both.
- Knowledge is accumulation of facts and data that you have learnt about or experienced. Data is freely available across so many platforms, internet, seminars, books etc.
- Understanding is finding out what works for you the best and gives rise to Wisdom. In a nutshell if knowledge is an information it cannot be applicable without thorough understanding.
A very small example is Credit cards, we have the knowledge that if they are a convenience they can become a head ache in no time. But do we really understand how big a head ache they will be if not used properly. As per ASICS credit card calculator, it can take nearly 14 years to pay off a $5000 credit card, with minimum payments at 21% interest rate. Deep knowledge is, understanding.
Time has come.
Time has come to learn how to save money, be wise towards our spending, live within our means and look forward to the future.
Maybe you are not in position to make a tough decision ‘now’ but at least with right knowledge and understanding, you will be able to prepare and plan for what’s ‘ahead’.
Now let’s come to the main point, what expenses are considered while considering your borrowing capacity.
What constitutes Living expenses?
If you don’t already know, most banks use predetermined index to calculate your living expenses. They may range from anywhere between $18,000-$50,000 per year for a single applicant. Expenses depend on your location, family size and lifestyle. Your bank statement is a pretty good indication of how much mortgage payments you can afford. There are number of things that are included in living expenses, common and discretionary.
Common expenses
Common expenses range from your morning coffee to utility bills to investment or owner-occupied property expenses. So now let me explain in bit of detail some common expenses: –
Child care– Everything from formal day care costs for each child, to nannies and occasional babysitters.
Personal care– All clothing, footwear, cosmetics, hygiene products, hair dressing, manicures etc.
Education– Fee for yourself or kids, including books, equipment and excursions.
Groceries– Includes meat, fruit, veggies, toilet paper etc.
Insurance– All insurance like vehicle, health, home and contents, life, income, care, pet etc.
Medical– Health care costs like dental, optical, doctors, prescriptions etc.
Utilities– Gas, water, electricity, rates, taxes, levies or any other cost to run your own home.
Entertainment– Take away food, dining out, movies, gifts, holidays, hobbies, gym memberships etc.
Connections– Mobile phone plans, internet, magazine or newspaper subscription etc.
Transport– Public transport costs, petrol, car registration, car parking, servicing and maintenance.
Rent– Rent paid if renting, boarding, sharing etc.
Investment Property expenses– council rates, property management fees, taxes and levies, body corporate/strata fee, maintenance etc.
These are all common expenses. Always disclose all other debts like ATO debts, HECS debt etc. not included in the above categories to Bank or Broker for proper assessment.
Discretionary expenses
By default discretionary expenses like one off holiday or luxury items, charitable donations, training, golfing, fishing, dancing etc. are already included in predetermined index.
‘Needs‘ drive non-discretionary or common expenses while ‘Wants’ define your discretionary expenses.
Financial institutions are looking more into your bank statements, credit card statements, social media etc. to make thorough assessment about your life style. If possible, it is time to learn and plan well ahead of time. Credit cards and Loans are some common expenses that effect the borrowing the most. Try to limit them.
Please note that the financial institutions do not implement thorough assessment of your living expenses to make it harder for you to get the loan, but to secure you and your lifestyle against Mortgage payments. In short, you might have to teach yourself the hardest lesson in life: self-control. Believe it or not, from here onward the ride is only going to get tough to borrow money. Buckle yourself.
References:
https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/credit-card-calculator
https://www.moneysmart.gov.au/managing-your-money/budgeting
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Avjeet Gill (Avi) is an accredited financial broker and a blogger. This article is a general representation of his thoughts and views. This work is a copyright of Avjeet Gill (Avi) and should not be used for personal or professional gains.
Please check with your bank or broker before you take any financial assistance. Avjeet Gill (Avi) or anyone associated with him will not be liable for any kind of loss.
If you have any questions, please do not hesitate to contact Avjeet Gill (Avi) at 0403706910 or email to avi@redtiemortgages.com.au