HEM Living Expenses: How are they calculated by lenders?
UberEats orders, gym memberships, restaurant meals and online shopping are just some of the monthly expenses lenders consider when working out if you can afford your home loan.
When you apply for a home loan your lender must take into account your average monthly living expenses to work out how much you can borrow. This is a legal requirement under the National Consumer Credit Protection Act.
Banks will run a very close eye over your bank statements to see what your actual living expenses are - and they might do this in a couple of different ways. Usually, lenders will use the Household Expenditure Method (HEM), although there are other ways too.
What is the Household Expenditure Method benchmark?
The HEM is the primary way that lenders will look at living expenses. It will assume a figure of how much someone spends based on more than 600 items in the ABS Household Expenditure Survey (HES).
The last HES was done in the 2015/16 financial year. This showed that the average household in Australia spent $1,425 in a week. For households with a couple and dependent children the average increased to $1,992. Banks would assume this spending when working out your borrowing power.
However, in the banking royal commission in 2018 banks were criticised for over-reliance on the HEM and not taking into account the efforts borrowers will go to in saving money when they're repaying their home loan.
And of course, the cost of living has risen exponentially since 2016, but no new data has been released.
How do you calculate household expenditure?
The HEM is calculated as the average spend on absolute basics such as food, utilities, transport, communications and kids' clothing. It also takes into account 25% of discretionary spending, on things like alcohol, eating out and childcare.
Non-basic expenses, for example overseas holidays, are excluded from calculations. Rent or mortgage payments are also not included in the HEM.
"Banks aren't solely reliant on HEM and generally would require your bank statements to run through your living expenses over a 30 to 90 day time period. As a mortgage broker, we request 90 days of living expenses… Downloading and going through your living expenses is always a good way to track your spending, highlighting and unnecessary expenses that can be stopped. If you live frugally, the banks can lower 'your HEM', based on providing the bank statements as evidence."
Lenders can use different methods to calculate your living expenses, including looking at the size of your family and the number of dependants you have. A young couple with no children will most likely have fewer expenses than a family of five. A young single borrower with an active social life will probably spend more each week than a pensioner who no longer drives and owns their own home.
Lenders will scrutinise your spending in multiple categories. While every lender is different, common categories include:
Travel and transportation
Housing costs*
Energy and utilities (including mobile and Internet plans)
Education costs
Health and fitness
Groceries
Eating out/entertainment
Shopping
*Keep in mind that if you're buying a home to live in then you would not be paying rent at the same time as making repayments, so lenders won't typically consider this an expense. Instead, they'll look at all your other costs and calculate how much you can afford to borrow and repay.
Lenders also look at your income, debts and assets.
What is the Henderson Poverty Index?
The HPI is less commonly used and was originally based on a survey of New York families in the 1950s, but has been updated using more recent Australian survey data. The index is calculated based on a family of two adults and two children, and it can be multiplied by a specific fraction to calculate a figure that applies to different family structures.
Living expenses and your home loan application
When you apply for a home loan, you need to provide information about your living expenses. With some lenders this will simply mean providing a rough estimate of your weekly or monthly spend on essentials like rent, groceries, transport and utilities, but other lenders provide detailed calculators to garner a more accurate picture of your ongoing commitments.
The lender will then compare the living expenses figure you provide with the relevant HEM or HPI calculation for someone who lives in your area and has the same number of dependants.
Married couple
Married couple with 3 kids
HEM weekly
$682
$1,124
HEM yearly
$35,472
$58,470
Yearly difference
$22,998 cheaper for a couple with no kids
There are plenty of free online living expenses calculators to help you work out your average weekly spend. You can also use our How much can I borrow calculator to determine your borrowing power.
Our hypothetical couple are 30-year-old newlyweds John and Jane. The couple live in NSW and don't yet have any children. They rent an apartment, they're both employed full-time and they take an overseas holiday each year. According to the HEM, John and Jane have living expenses of $682 (not including rent) per week. Over the course of a year, this amounts to a total expense bill of $35,472.
Now let's assume that John and Jane have three dependant children whom they need to support. If all their other circumstances remain the same, John and Jane now have living expenses of $1,124 per week (not including rent), and total yearly expenditure of $58,470. That's $22,998 more in expenses than a childless couple, which will obviously have a big impact on John and Jane's ability to repay a home loan.
To put it in slightly more understandable terms, that's a difference of $442 each week that could go towards regular home loan repayments.
* This is a fictional, but realistic, example.
How can I boost my borrowing power?
If you want to apply for a home loan and want to increase your borrowing power (or just strengthen your chances of getting the loan approved) there are a few steps you can take:
Cut back your expenses. Lenders won't examine your entire life's worth of spending but they will look closely at the months leading up to your application. So before you apply, hold off on big purchases and try to trim down your spending.
Increase your deposit size. If you can add a bit to your deposit your loan amount will shrink, increasing your chances of approval (or how much you can borrow).
Reduce your debts. Focus on paying off urgent debts if you can before applying.
Check your credit score. Your lender will look into your credit history, but you can check your credit score for free beforehand. This will help you find any nasty surprises or errors on your file.
While these tips can help strengthen your application, make sure you're borrowing an amount that you can comfortably repay.
Rebecca Pike is Finder's senior writer for money. She joined Finder after almost four years writing for business publications in the mortgage and finance industry, including three years as editor of Mortgage Professional Australia. She regularly appears as a money expert on programs like Sunrise and Today, as well as across radio and newspapers. She also holds ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products. See full bio
Rebecca's expertise
Rebecca has written 198 Finder guides across topics including:
As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio
Sarah's expertise
Sarah has written 191 Finder guides across topics including:
When you apply for a home loan, a lender will take many serviceability factors into consideration when deciding whether or not to approve your application.
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