Will Afterpay and UberEats stop me from getting a home loan?

A few years ago, splashing out on good steak and a bottle of wine would see you get hurt when it came to getting a home loan.

The now infamous “shiraz and wagyu” case, which centred around household expenditure measures and how likely it was that you could afford your repayments, made it all the way to the Federal Court.

So, what do banks look at now when deciding your borrowing capacity?

How banks determine borrowing capacity

Obviously, the bank is going to want (and need) to know things such as your household income, your number of dependants, your credit score, how much of a deposit you have, if you have a guarantor or other assets you’re securing it against, and if you intend on living in the property or renting it out.

What else is considered?

What other debts do you have?

It’s important to know that your other debts will reduce your borrowing power. This includes car loans, buy-now-pay-later apps, ATO debts and HECS. Some research earlier this year from Compare Club showed that having a HECS debt alone reduced your borrowing power by $15,000, on average.

If you have a credit card, that will also reduce your borrowing capacity. Most banks won’t look at what’s currently outstanding, but what your credit card limit is. This is important to know if you have a large limit that you don’t ever use – you may want to consider reducing the limit or get clarity on the impact it’s having on your borrowing power.

If you have “bad debt”, meaning debt that’s not against an asset that grows in value (and normally attracts a high interest rate), it’s wise to consider your strategy to get these paid down before you look at landing yourself with a large mortgage to cover, too.

Do banks care about your spending?

Broadly, yes. They will require you to declare your living costs (and you must remember costs like private health insurance and life insurance, as some banks see these as “non-core living costs” – which is odd but true).

Every bank has a different approach; sometimes it’s dependent on your deposit size. If you have a smaller deposit, you may find the bank wants to dig deeper into your statements and see where you are spending your cash. Other banks won’t look at statements at all and will work off the living costs you provide them.

While this means you don’t need to give up your favourite drop of vino or delete your Uber account, if you are planning on buying a property and have a smaller deposit (under 20 per cent) it would make sense to rein in the spending.

This will boost your deposit (which may mean there are more mortgage products available to you) and also help if the banks want to see your typical spending habits in detail.

Factoring in additional interest rate increases

Given the rollercoaster of interest-rate changes we have had over the last year, we have already seen people’s borrowing power slashed substantially. This is frustrating news for people looking to enter the market as recent national housing data shows property prices have continued to defy expectations and rise month on month.

So, with large amounts to pay to acquire a property, banks want to stress-test your ability to financially absorb the shock of any extra rate rises that may occur in the future. If you can’t afford future rate rises, they will reduce the amount they are prepared to lend to you.

So, you don’t need to panic that every single amount you spend will be reviewed with a fine-tooth comb. However, getting a mortgage at a time that is arguably harder than ever – given the lack of supply, increasing prices and reduced borrowing capacity – means you’re going to need to cut back, save hard and bring in as much income as you can to get a foot onto the property ladder.

Jessica Brady is a licensed financial adviser and runs affordable online money programs for people who want to learn how to be financially free.