The short answer
HEM, the Household Expenditure Measure, is a benchmark of household living costs developed by the Melbourne Institute. A 2018 ASIC review found that lenders using HEM assessed serviceability on the higher of your declared expenses or the benchmark. ASIC has said a benchmark doesn’t prove what you actually spend, so lenders still need to ask about and check your real expenses.
What HEM is
HEM is a benchmark of what households spend on living costs, varying with things like household size and income. ASIC explains that HEM is built from the median spending on absolute basics, plus the 25th percentile of spending on discretionary basics. ASIC has noted that many consumers spend more than this.
HEM leaves out mortgage payments and school fees, so lenders need to ask about those separately.
How lenders use it
When you apply for a home loan, you declare your living expenses. A lender checks whether that figure looks realistic. A 2018 ASIC report found 8 of the 12 lenders it reviewed used HEM in some way, and each of those 8 assessed serviceability on the greater of the borrower’s declared expenses or the benchmark.
In that review, if a borrower’s declared expenses were below the benchmark, the lender used the benchmark. Today each lender has its own policy and may adjust the benchmark.
Why your real expenses still matter
ASIC has said a benchmark figure doesn’t provide any positive confirmation of what a particular borrower’s expenses actually are. In 2018 ASIC announced that one of the big four banks had admitted its automated system used the benchmark instead of borrowers’ declared living expenses when assessing home loans. ASIC raised it because a benchmark can’t confirm what a borrower actually spends.
For you, that means two things:
- Declare everything. Under-stating expenses doesn’t help: lenders usually ask for recent bank statements, and a loan you can’t afford is a risk to you.
- Know your numbers. Lenders usually ask to see recent bank statements, so your declared figures should match what the statements show.
How to get your expenses ready
- Go through the last three months of bank and card statements.
- List regular costs: groceries, utilities, transport, insurance, phone and internet, childcare and school fees, subscriptions and entertainment.
- Note debts and their repayments separately: car loans, personal loans, credit card limits and buy now, pay later.
- Total it with our budget planner, then try the borrowing power calculator.
Why it can change what you can borrow
Lenders treat expenses differently. One may adjust HEM for where you live or your household; another may weigh certain costs differently. That’s one reason borrowing power can differ between lenders. Read more in our guide to how much you can borrow.
Mortgage broker at My Finance Consultants. Daniel compares home loan options from a panel of 40+ lenders for refinancers, investors and home buyers, by phone, evenings included. About Daniel
General information only. It doesn’t consider your objectives, financial situation or needs, and it isn’t tax, legal or financial product advice. Lending criteria, fees and charges apply.