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Your living expenses play an important part in your broker, or the bank assess your home loan application. To work out your Borrowing Capacity, your living expenses will be a key factor; how much can you borrow, or even if you can afford one.

So, what is the Household Expenditure Measure (HEM) and why does it matter if you’re applying for a home loan?

In this article, we cover:

What is the Household Expenditure Measure?

How is HEM used?

What types of living expenses are considered in a home loan application?

Why are living expenses important in a home loan application?

Why is HEM controversial?

What is the Household Expenditure Measure?

In a nutshell, HEM is what many lenders / banks use to estimate a borrower’s living expenses, which helps determine how much money someone can afford to borrow for a home loan.

The use of HEM is widely controversial because it can underestimate non-essential living expenses, potentially leaving borrowers struggling to make their home loan repayments if approved.

Some banks have been known to rely heavily on the HEM benchmark to approve home loans, a practice which came under intense scrutiny during the Banking Royal Commission.

The HEM is a standard benchmark that some banks use to estimate people’s annual living expenses when considering home loan applications. HEM classifies more than 600 items in the Australian Bureau of Statistics’ Household Expenditure Survey as absolute basics, discretionary basics or non-basics.

HEM can be explained as follows:

Absolute basics are most food items, children’s clothing, utilities, transport costs and communications.

Discretionary basics include take-away food, restaurants, confectionery, alcohol and tobacco, adult clothing, and entertainment.

Non-basics include luxury services such as gardeners and overseas holidays.

HEM is a net-of-housing costs measure, reflecting median spend on absolute basics plus the 25th percentile spend on discretionary basics. Rents and mortgage payments are not included, with the items used to work out modest expenditure for different types of households. Income, location, family size and type of lifestyle (student, basic, moderate or lavish) are factored in.

How is HEM used?

The Household Expenditure Measure (HEM) can be used by lenders to assess borrowing capacity and help determine if applicants can afford a home loan. Separately, the Henderson Poverty Index (HPI) can be used to calculate living expenses, but not all lenders use these different methods, and some lenders have developed their own methods.

What types of living expenses are considered in a home loan application?

Some common living expenses you may need to provide an estimate of in a home loan application could include:

Food and groceries

Entertainment and recreation

Clothing and personal care

Communication (internet, phone bill)

House expenses (rates, gas and electricity bills etc)



Education (Public or Private School fees)



children and pets (childcare, sports, tuition, pet expenses)

Health and fitness

Other regular outgoing expenses

Why are living expenses important in a home loan application?

Whenever a person applies for a home loan, mortgage brokers and lenders are required by law, under the National Consumer Credit Protection Act 2009 and related responsible lending regulations, to consider their living expenses (among other factors), to provide a fuller picture of their financial situation and whether they’ll be able to pay back the loan. Mortgage Brokers are also bound by Best Interest Duty Law that banks are not. One way they can compare the declared expenses is using the HEM, which is meant to be used as a benchmark figure only. Mortgage Brokers and Lenders are also expected to make inquiries of their own about a borrower’s current income and expenses.

Why is HEM controversial?

The use of HEM as a benchmarking tool has been criticised because of concerns people were being approved for loans they couldn’t afford to repay. This is because there can often be a difference between borrowers’ estimated and actual expenses. Hypothetically, borrowers could struggle to meet their repayments if approved for a home loan following their living expenses (including non-essential items) being underestimated.

Historically, the grilling of one of Australia’s largest banks at the banking royal commission revealed how shortcuts were being made in loan approvals and living expenses were being underestimated in some cases. As part of the Hayne Royal Commission, ANZ was found to have defaulted to using HEM in 73% of cases, instead of doing a deep dive into borrowers’ expenses.

The banking royal commission found HEM was more useful to assess border-line borrowers and it did not show the full picture of a borrower’s income and debt. The final report stopped short of pushing for the HEM to be scrapped altogether, after several lenders had already started to move away from it.

In the separate ‘wagyu and shiraz’ case, the Australian Securities and Investment Commission (ASIC) famously lost a landmark case against Westpac, with the judge, Justice Nye Perram, saying “borrowers can forgo Wagyu beef and the finest Shiraz for more modest fare to meet loan repayments”. He found Westpac had not breached responsible lending laws by using HEM, instead of declared living costs, when assessing home loans.

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We can be a one-stop-shop for your financing needs. Contact us to find out more about how we can help you with commercial and asset finance.


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The information on this website is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.