Page 48 - Smart Money

Chapter 2

means they assess what you could afford to borrow if the interest rate
were 7.25%.

This safeguards you, so that if there are interest rate rises through the
Reserve Bank of Australia (RBA) that are passed on, you are not going
to be in a position where, after one or two rate rises, you’re going to be
in financial hardship. It is the bank’s way of stress testing your financial
position and making sure that they don’t lend you more than you can
actually afford to repay.

The other variable is your living expenses. Different banks use different
systems. One of these is the Henderson Poverty Index. This index uses
the average cost of living, irrespective of income, for the average single
person or couple, with or without dependent children. There is another
system, known as HEM (Household Expenditure Measure) that is based
on what you earn. Using this system, the assumption is based on the more
you earn, the more your basic livings costs are. Previously, all banks used
the Henderson Poverty Index, but now many banks have moved towards
HEM.

Case Study
As an example, if you went with Keystart Home Loans, and they agreed
to lend you about $200,000, you would probably get $250,000 or
$260,000 from a bank like the Commonwealth Bank of Australia (CBA),
because Keystart don’t lend a lot of money. But you only need a 2%
deposit with Keystart. So there could be a variance between the CBA
and Westpac, where the CBA might loan you $250,000, but Westpac
might loan you $270,000 under the same scenario. It happens quite a

bit, which is why we do refinancing. If you can’t afford what you want

with one bank, we refinance you elsewhere so you can get more money
and better products.
The borrowing calculators you find on websites are very generic. They
have a generic assessment rate and generic living expenses. Obviously
there is no way to include every single bank’s assessment rate and living