Hidden spending habits derailing home loan applications.

Young Australians are losing their shot at home ownership due to underestimating their living expenses on mortgage applications, with some understating monthly spending by more than $1,000.

According to research from Money.com.au, one in five homeowners significantly underestimated their living expenses when applying for a mortgage. Within this group, 12% had their underestimation flagged by a broker or lender but still proceeded with their loan, while 8% had their applications rejected outright.

The findings come as household spending continues to rise across the country. Australian Bureau of Statistics data shows household spending jumped 1.3% in October and is now 5.6% higher than a year ago, driven by increased discretionary purchases across clothing, furnishings, electronics, and hospitality.

Money.com.au mortgage expert Debbie Hays said many borrowers have little real visibility over their day-to-day spending, creating risks for both clients and brokers. "Most people don't know how much they spend each month," Ms Hays said. "More often than not, mortgage applicants will have an estimate of their living expenses, and when you go through their bank statements, you find glaring inconsistencies. You want to find those errors before you submit your loan application."

Lenders are conducting thorough reviews of applicants' financial situations, examining bank statements line by line to verify declared expenses. This scrutiny applies equally to refinancing applications as it does to new loans. Despite these challenges, the majority of borrowers are accurately representing their finances, with 69% of mortgage holders correctly estimating their expenses and 11% even overstating their costs.

The research revealed a significant generational divide in expense estimation accuracy. Among those who underestimated their expenses, 32% of Gen Z applicants had their home loan rejected, compared with only 13% of Millennials. This disparity highlights the importance of financial education and thorough expense reviews, particularly for first-time buyers and younger borrowers who may have less experience managing their finances.

Lenders typically use the household expenditure measure (HEM) as a benchmark for assessing living expenses, adjusting for income, relationship status, and dependents. They compare this benchmark and the borrower's declared expenses with at least three months of bank statements. If actual spending exceeds declared amounts, lenders will use the higher figure in their calculations. In many cases, this reduces borrowing capacity and can sometimes push applications below serviceability thresholds, resulting in rejection.