Key takeaways from this article:

• Why is it helpful to calculate your living expenses?
• When does the bank need to look at your living expenses?
• How do banks calculate living expenses?
• Can you increase your borrowing ability by tweaking your living expenses?
• 10 ways to reduce your cost of living
• We're here to help you manage your money effectively

Why is it helpful to calculate your living expenses?

It helps you to budget wisely and achieve your financial goals, making sure you’re heading in the right direction with your finances. That means knowing where you are, where you want to be, and how you’re going to get to your destination. These questions may be helpful when you start planning:

1. What is your current financial situation?
2. What would you like to achieve with your money?
3. How will you get from A to B – from your starting point to reaching your goals?

To understand your starting point, it’s handy to have a full picture of your finances, including:

• What you earn
• What you spend
• How much you have in savings
• What you own
• What debts you have

A cost-of-living calculation is a big part of that overall picture. It helps you understand your income and expense situation: how much you earn, what you spend, and what you spend it on. Once you have this information at your fingertips, you can identify areas to save, or ways to boost your income. That can put you on track to reach your financial goals, whether it’s growing your emergency fund, buying a house, or going on holiday.

You can also use the Westpac App Budget Tools to help you track and categorise your spending. This lets you compare spending categories as well as track your income and outgoings. Use it to spot opportunities for savings and keep on top of your outgoings. You can also tag and filter transactions in a way that works for you.

When does the bank need to look at your living expenses?

It’s helpful to know your living expenses when you are applying for a home loan; the lender will likely want to see evidence of your income and your financial commitments. The amount of money you can borrow depends on how much you have available to ‘service’ future loan repayments. The lender can help you complete a borrowing capacity calculator to establish how much you might be able to borrow. We want borrowers to be able to make their repayments comfortably.

You may be applying for a home loan, a car loan or another type of personal lending. The lender will request paperwork showing your salary, all your accounts, credit card or store card statements, and your buy-now-pay-later lending, for instance.

This can seem unnecessary, but lenders need to comply with the rules on responsible lending. Responsible lending means lenders must not loan money to people who aren’t in a financial position to make the loan repayments. Lending to people who can’t pay back the loan could put them into financial hardship.

Lenders must make “reasonable inquiries” about your financial situation to assess whether you are a suitable candidate for the loan. This information must also be verified as far as possible, so sometimes you might be asked for extra details, such as a letter of confirmation from your employer. This can take time, which is why it’s best not to leave your loan application to the last minute.

How do banks calculate living expenses?

The information you provide to the bank, including your estimated monthly living expenses, is an important part of how banks calculate your outgoings. Each lender has their own formula for assessing whether your loan will be approved, and your spending will be part of that calculation.

You may also have heard of the Household Expenditure Measure (HEM). This is a statistical guide to what households typically spend on living costs in Australia. The HEM provides lenders with a rough estimate of what a household like yours, in your location, would spend in a month depending on your lifestyle. If your cost-of-living calculation is extremely low, the HEM can help the lender decide whether your super-frugal lifestyle is realistic. They may look at your own estimates and the HEM, and use the higher of the two as a starting point for estimating your outgoings.

Can you increase your borrowing ability by tweaking your living expenses?

Before you apply for a home loan, cutting your spending may increase your borrowing power. It probably won’t make a big difference – it’s not going to double your borrowing power – but it might be enough to get your loan approved. Ideally, you should plan and review your discretionary spending for at least three months before you plan to apply for a new home loan.

Reducing your credit limits and getting rid of any debt is also helpful. Even if you pay off your credit card every month, think about whether you need it. When a lender is calculating your borrowing ability, they’ll assume that your credit limits are maxed out, even if you are carrying a zero balance. In theory, you could get your home loan approved, then max out your credit cards and revolving credit the next day. This will reduce your borrowing capacity because the lender’s calculator will add in the cost of servicing this future debt. By reducing or closing unused lines of credit, you can increase your borrowing power.

Finally, income is a big decider in your ability to make loan repayments, so if you’re in line for a pay rise around the time you’re applying for a home loan, get that in writing from your employer.

10 ways to reduce your living expenses

From small tweaks to big lifestyle changes, cutting your cost of living can improve your financial position. Here are 10 ways to lower your cost-of-living expenses, starting with the easiest actions you can take:

1. Cancel subscriptions. Review all your regular subscriptions and decide which ones you can live without. If you’re not using a particular app, or you need to tighten the purse strings, consider cancelling it.
2. Shop around for deals on utilities. Power, a phone plan and broadband are all must-haves, but you could save on expenses if you look around and compare providers, taking advantage of promotions, deals and offer.
3. Review your insurance. Consider what insurance you need and whether you can get a better deal from a new provider. Bundling up policies with a single insurer can also reduce your premiums.
4. Prepare your food at home. If you regularly tap your card at cafes and restaurants, or food delivery apps, this is an area where you could make savings. Plan your meals and buy in bulk - you may even find it’s easier to stick to a healthier diet.
5. Spend less on fuel. Shop around for fuel prices, get your tyre pressure right, remove unnecessary weight from your vehicle and drive smoothly. As well as boosting your fuel efficiency, look for opportunities to use public transport, walk or cycle.
6. Cut your energy use. Short showers, hot water bottles and using the washing line are just a few of the many ways you can save power at home to lower your bills.
7. Look for free entertainment options in your region. You may be surprised at the range of activities on offer, from free books and magazines at the local library to free concerts and performances.
8. Sell unused items. Old sports gear? Unwanted furniture? Clothing that never quite fitted you right? Sell them online and you could earn some cash while also freeing up space.
9. Extend the life of the items you already own. Before you replace anything, can you repair the old item? Can you have a phone repaired or have those winter boots resoled? If you do need to replace your items, check out the second-hand options before you fork out for a brand-new product.
10. Downsize or move. For many Australian households, rent or mortgage payments are the largest regular expense. Compare accommodation arrangements, e.g. moving to an area with a lower cost of living, or downsizing, as this could reduce a significant outgoing.

It may also be worth checking to see if you are eligible for any Government payments. Services Australia has a full list of payments and a handy guide.

We’re here to help you manage your money effectively

Do you have questions about how to reduce your cost of living? Would you like to know more about getting ready to apply for a home loan? We’re here to help, get in touch.