What is the HEM and how does it impact mortgage borrowing capacity?

The household expenditure measure (H.E.M.) is used by lenders to assess your loan application.

When you’re applying for a mortgage, lenders don’t just look at your income, your deposit or the amount of equity you’re bringing to the table; they also look at how much you spend each week, month and year. Another factor is how many dependants you have and what life stage they’re at.

This is because they need to see not only how much you earn but how you spend it and on what because this can help to determine how much money you’ll have to make your monthly repayments.

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Why are my living expenses so important?

Simply because you need to spend them to, well, live! Your living expenses include things like your groceries, your fuel or train pass, your clothes, your medical costs and so on… These are things that you can’t scrimp on or eliminate, so you have to spend a certain amount of money on them and this amount has an impact on the amount left for mortgage repayments depending on the types of mortgage loans.

It’s actually a legal requirement on the part of the lender to look at your living expenses, under the National Consumer Credit Protection Act. This means that no responsible lender will offer you more money than you can realistically afford to repay.

You’ll probably find most lenders are cautious and conservative, too, because they have to stress test your finances to take into account the costs of things like replacing cars, a new baby, reductions in working hours and so on.

You can budget your expenses with the InfoChoice Budget Planner calculator.

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How are living expenses calculated and what is the HEM?

Many lenders use the Household Expenditure Measure (HEM) to calculate the living costs of home loan applicants. There’s also the Henderson Poverty Index (HPI), but this has been somewhat overtaken by the HEM.

Westpac has recently been in court over its’ use of the HEM to approve home loans – and won.

The Household Expenditure Measure

The HEM is seen as more flexible than the Henderson index because it takes into account  more than 600 data points in calculating basics.

These data points include the median spends on things like groceries, children’s clothes and shoes, transport costs, internet and telephone bills and other essentials.

The HEM also looks at discretionary expenses like eating out, babysitting fees and alcohol. So–called lavish items like overseas holidays, $100–dollar candles and so on aren’t included because, in a pinch, households can simply avoid or eliminate them.

One of the reasons the HPI is less–favoured in Australia than the HEM is because it’s very similar in function and results to the HEM until you step outside the “standard” two–parent, two–children family. When it comes to larger families, single–parent families or single people, the HEM may not be as generous.

However generous (or not) the HEM allows lenders to be, it’s Australia’s preferred method of calculating and assessing expenditure because it’s based on realistic, modern information. It also has different equations for each type of household situation and family – different numbers of children (or none) for example.

Your living expenses and your mortgage application

When it comes to making an application for your home loan, you’ll have to give the lender information on your living expenses and also your non–essential expenses.

Some lenders will want an estimate of your weekly or monthly spending on groceries, rent, transport, childcare and clothing while others will want a more detailed breakdown. You’ll have to be prepared to provide information on your actual household expenses instead of an estimate.

What are my personal household expenses?

Your personal household expenses are the amounts of money spent on keeping everyone within the household fed, clothed, healthy, warm and ferried between home and work or school. These are the expenses that you can’t pare down any further without enduring some hardship.

What are my actual expenses?

This is the picture that lenders really want to see. You have your basic personal expenses, but there’s more to it. While you’re out buying new shoes for the kids, you all stop to grab an ice cream and maybe some coffee for you. This adds an extra $20 or so that you might not have expected or planned for to your monthly expenditure. You could, if you really had to, do without these treats, but no bank or lender will expect you to unless you’re really on the breadline. Treat or not, however, that’s $20 that’s not going to your mortgage repayments.

Once your lender has this accurate picture of your spending habits and amounts, it can compare it to a similar household in your area. It’ll take the higher figure – whether it’s yours or the regional average – and use this figure to determine how much you can borrow and repay easily or comfortably.

There are lots of living expenses calculators online so that you can work out your average weekly and monthly spending. You can also use them to reduce spending in any areas that aren’t strictly necessary. If you can then present your streamlined budget to your lender, you may be able to borrow more.

What are basic, moderate and lavish HEM levels?

The HEM has three levels of spending that lenders may fit you into – lavish, moderate and basic.

You might think that the more you earn, the more you can borrow, but it’s not quite as simple as that.

Banks and lenders are well aware of the fact that the more you earn, the more you spend. Of course, there’s always exceptions to this rule, with some high-earners living frugally, but in general, your expenses rise alongside your pay packet.

It’s not even necessarily the case that you’re being lavish. You may work long hours to bring in that salary, so you employ a cleaner and a nanny out of your $120,000 annual salary. You may be surprised to find, then, that simply earning more than average doesn’t always mean you can borrow a huge amount more than average.

Most calculators assume a basic spending level, and once you get into higher salaries and higher expenditures, your home loan wings can be clipped.

Before you head to a comparison site to look at the different mortgages on offer, it’s worth looking at your spending habits to see if you can dial them back into moderate or basic to make the most of your disposable income.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.


Rates are headline rates at the time of publishing, not comparison rates, fees not included.

Rates based on owner-occupier, variable rate, principal and interest 25-year, $300,000 loan amount with a package.

Comparison rate is based on a secured loan of $150,000 over the term of 25 years.

WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan

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