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- Join Date
- Mar 2010
What is the Henderson Poverty Index
Banks by law must ensure that every borrower has the ability to service all committments, and have sufficient to cover the cost of living for the borrower and any financial dependants.
This is of course a tricky question, because no two families are the same, and no ones predicament remains constant.
Calculating INCOME isn't too difficult for those on wages, but note that different lenders have different treatments for bonuses, overtime, commissions, shift allowances, and other non standard wage items. Some count it all, whilst others count a portion of it, and in some don't count any of it unless it has been ongoing for more than 12 months.
Usually they work on Gross income, and their calculators automatically calculate tax and medicare levies, and deduct that amount. They are quite accurate.
Ongoing Centrelink Benefits can be counted as long as the borrower has a Centrelink statement showing the amount of the benefit, and it can be established that it would be ongoing. For example a rental assistance payment would cease once they bought their own home. Family allowance is included, except where children are getting older and that benefit will cease in the next few years. Usually 14 is the age it cuts out as an income inclusion for the lenders.
RENTAL INCOME on Investment Property - lenders accept either the renting agents written advice, a copy of a recent rental statement, or in the case of a new purchase, a letter from a reputable rental agency stating the anticipated rental income.
They then deduct at least 20% for contingencies, to cover rental agents fees, vacant periods, local authority rates costs, insurance etc. Generally that works out to be quite close to the mark.
REPAYMENTS ON THE LOAN - that is easily calculated, but the lenders add a buffer of at least 1.5% to ensure there is some surplus in the calculation.
LIVING COSTS - This is where the Henderson Poverty Index comes in. Lenders need to use an accepted allowance for the normal cost of providing food, clothing, and other day to day items of expenditure.
I suggest that you have a good read of the website HERE to acquaint yourselves with how this is calculated. You will note that it is updated quarterley, so it is kept up to date as much as possible.
For example a family of two adults and two children who have their own home, currently need a weekly amount of $585.25 to cover living costs not including house repayments. That is $2536.08 per month.
Naturally if there are items such as private school fees and private health insurance, then they must be added in as additional costs.
Once all of the costs have been deducted from the income, the lenders are usually looking for a surplus on top of that to give them some comfort. Some lenders want 1.2 times cover, some are happy to make a case by case judgement.
All of that is a bit of a simplification, but nevertheless covers the main points. I haven't tried to cover self employed homebuyers, I just don't want to spend hours covering two years tax returns and add backs when most here are probably employees. However I can if someone has a question.
Back to the Henderson Poverty Index - what do most of you think of the allowances made. There is also one that covers those who rent. For example a family of two adults, and two children are calculated to need $756.05 per week to cover living costs including rent. In my view that is light on, but that is not used by banks, only the "Other than housing" is used. they then add rental on as a cost if the buyer is renting elsewhere.
Now when someone mentions the Henderson Poverty Index you will know what they are talking about.
Do people here think it is a reasonable allowance, or insufficient?
PS I also posted this at CC.
Excellent and relevant info Peter.
It seems the allowances are quite modest, but then again I think living costs are quite high (I just got back from weekly shopping....shook my head at the prices of healthy food.)Gold may be a barbarous relic, but in barbarous monetary times, relics do well. Steve Keen
Because Australia suffers from quite acute housing shortages we shouldn't expect to see any significant falls in prices. Chris Joye June 2010
My investment company: www.empireinvesting.com.au
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- Join Date
- Feb 2010
Banks assess even less!
I didnt actually know about it but I think that the Henderson Index may be ok but the problem is that the Banks do not seem to apply it or any other standard when assessing capacity.
I know that a number of providers use a borrowing power calculator from Infochoice. Here is one that was linked from Mebank.
For two adults and two children they quote annual expenditure of $28680 or $551 per week which is under the rate noted on the Henderson Index. It would seem that mortgage providers are not even up to using the poverty index as a base line.
It could explain the reason why such a small increase in rates these days hurts some so much.
Rather than all the talk of re-regulating the banking industry maybe the best idea would be to amend the Uniform Consumer Credit Code (is it still called that?) and then get APRA to ensure minimum lending standards. You could then ensure that the Henderson index (or similar) is applied as a minimum and that a stress test is conducted assuming 10% rates with maximum 30-35% GMI before approval.
I remember when working for one of the big 4 about 12 years ago that this was the absolute minimum required before an approval was even considered.
This way the size of loans is kept in check and directly relates to income and capacity and the same standards applies to everyone.
This must be better than regulating rates.
- Join Date
- Mar 2010
Given the very tough regulations and penalties for non-compliance, I doubt that any lenders would be using less then the current Henderson figures.
I personally know of several people who got massive mortgages during the housing boom whilst on unemployed benefits or the single parent's pension. My radiologist was just telling me last week that he went to the bank for a loan recently and they offered him almost double what he asked for and way beyond what he considered he could repay.
- Join Date
- Oct 2010
i got a mortgage through a large lender (international) with no deposit, using my first home owners grant as 5% deposit, on average annual salary of $45,000 for $270,000 on a 25 year term. it took about 12 business days to exchange... i have a feeling the banks have not been as cautious over the last few years as they are letting on....
- Join Date
- Aug 2010
Very interesting Peter.
The figures seem about right to me (assuming they are after tax). My back of the envelope calculations for our renting family of four is that $800/week is sufficient to get by. That excludes holidays and other recreational items like computers and electronics, bikes, and toys.
A detailed cross country comparison of these changing costs of living and incomes would be very interesting.
I seems that 1.5% buffer has proved inadequate this time. If you took out a loan just prior to Oct 09, that buffer disappeared in less than 6 months and now a year out we are at interest rates rises approaching 3%, when you add in the banks unilateral rises to the official RBA rates.
I also find it odd that they have a flat 1.5%.
Consider a 5% loan compared to a 10% loan. That 1.5% rise in IR's equates to a 30% rise in payments on the lower interest loan compared to a 15% rise on the higher IR loan.
Would it not be more sensible to add as a buffer, what percentage loan repayments may go up by, instead of an arbitrary 1.5% buffer.
In a low IR cycle, this buffer has proved completely inadequate and outdated , as we have seen repayments go up by nearly 60% in 12 months for a 5% loan.
Also considering that this buffer was present when you required a 20% deposit. However when rates were higher I remember the rate my bank talked about was up to 3% in the mid 90's. But that could have been just for little ole risky me, being self employed.
People who took out high LVR loans in the last 12 months are in deep dodo.
Another thing I just found out, from reading the money morning blog, is that 30% of new owner occupier loans are interest only. What the hell! 30% of people have no intention of paying down their loans and just expect prices to keep rising forever.
What a warped and dangerous banking world we live in.
None of that is a 'problem' if house prices keep increasing...
- Join Date
- Mar 2010
Note that at the end of the calculation, the lenders are still looking for a surplus above and beyond cover. For example a monthly surplus of $1 in this enviroment just won't cut it.
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