Household Expenditure Measure: how HEM affects your loan

HEM is a living-expense benchmark banks use when working out how much you can borrow. If your everyday spending is below the bank’s benchmark, it may still use the higher figure. It can then add school fees, debts and other costs separately.

That is why cutting another $50 from the grocery bill may leave your loan estimate unchanged. I’d first check which expense figure the lender is using, what sits outside it, and whether the proposed repayment fits your actual budget.

Say your covered living expenses total $2,800 a month, but the bank uses a $3,000 benchmark. In this example, it also counts school fees separately.

Reducing the $2,800 to $2,600 saves $200 in your own budget. The calculation above would still use $3,000, plus the separate costs. That saving can help your deposit without automatically increasing your loan limit.

If a separately assessed expense falls, the bank may have more income available for repayments. The change in borrowing capacity depends on the rate, term, income and the rest of the application. There is no fixed rule that saving $100 a month gives you an extra $15k or $20k to borrow.

The Melbourne Institute publishes HEM quarterly using Australian Bureau of Statistics household spending data linked to the Consumer Price Index. It is a measure of modest spending across different household types.

Its calculation combines median spending on basic needs with the 25th percentile of spending on discretionary basics. That includes some eating out and entertainment. Rent and mortgage payments are excluded from HEM itself.

For your application, the practical question is which expenses your lender compares with its benchmark and which it adds separately. APRA expects banks using benchmarks to compare them with declared expenses. So we start with what your household actually spends.

There is no single HEM figure that applies to everyone. Household size, dependants, income and the lender’s implementation affect the calculation. An old online table or a friend’s approved loan will not tell you your current limit.

We can run your circumstances through suitable lenders’ current calculations. Bring your own spending figures too. If the bank allows less for something than you actually spend, you still need enough money to pay that bill.

Applying in one name does not necessarily mean a single-person expense allowance. Your partner and shared household costs can still matter. We check the lender’s requirements before choosing the loan structure.

Shared care can affect how a lender assesses your household, but it doesn't automatically halve its allowance for the children. If you have 3 children in 50/50 care, give us all 3 ages and the care arrangement for each child. Several lenders still count all 3 as dependants.

Child support you pay is usually added on top of your living costs, and the children are still counted. Some lenders, like Macquarie, have looked at it case by case in scenarios we've worked on, so we check it for your situation.

Another option is to ask the lender to count the children differently. ING can do this case by case when you share care and have a child support agreement or court order. We check it for your situation before using a higher figure.

I start with what you actually spend, then check how the lender's benchmark applies. Reducing a dependant allowance won't necessarily increase the loan if your declared spending is already higher. Our shared-care and child-support guide explains what evidence helps, and our borrowing-power guide covers the other commitments that affect the result.

Macquarie’s home loan review covers its broader lending options. Its help page puts private health insurance under additional expenses, owner-occupied strata under general living expenses, and investment strata under investment costs.

Body corporate fees can make a difference to the loan amount. We check how the current calculator counts them before you rely on an estimate.

Teachers Mutual Bank Group has assessed school fees within overall living expenses in client cases we have worked on. This can help families whose regular bank adds the fees separately.

Macquarie may consider excluding fees where savings cover the remaining schooling years or a cash-out from the home loan is specifically for the fees. We check what cash remains after the purchase and the extra debt involved.

Our school-fees guide explains both approaches and settled client comparisons. The family still needs to afford the school bills and the loan. Moving a cost in a lending calculation does not remove it from your budget.

Review transaction accounts and credit cards together. Separate transfers between your accounts from actual spending. If you count each purchase on a credit card, do not count the transfer that pays off those purchases as another living expense. The lender still assesses the credit facility separately.

Include cash spending and bills paid through another account. A $1,200 annual bill needs $100 a month set aside. A $900 quarterly bill needs $300 a month. This is more useful than copying one unusually cheap month.

If a transaction is a genuine one-off, explain what it was and why it will not continue. If groceries regularly cost $1,200 a month, use that figure. Calling part of it something else will not make the household cost disappear.

That leaves $1,000 a month. Decide whether it covers the savings and unexpected costs your household needs. The bank may use higher expense figures, count income differently and test a higher mortgage repayment.

Banks also test the repayment at a rate at least 3% above your actual loan rate. HEM is only one part of the borrowing check. Our borrowing power guide explains the other limits, including debt-to-income (DTI).

Use Moneysmart’s budget planner to set out your own figures, then check them against your next pay cycle. Keep changes realistic enough to continue after buying.

Rent may stop when you move into your own home, while rates, building insurance and maintenance begin. If you buy an investment property and keep renting elsewhere, your rent remains an expense.

Some lenders use an assumed housing cost when you are buying an investment while living rent-free. Macquarie specifies $650 a month per household for an investment purchase or refinance where the applicant lives with family or friends rent-free or at unusually low rent.

This rule is for investment loans. For a home you will live in, tell us when you will move in and which housing costs will continue. Our rentvesting guide covers the costs of renting while you invest.

A zero card balance does not mean a zero commitment in the bank’s assessment. Macquarie’s published credit guidelines use 45.6% of the card limit each year, equivalent to 3.8% a month.

At the 3.8% assessment above, a $10k credit-card limit uses $380 of monthly repayment capacity. At an assumed mortgage assessment rate of 9.50% over 30 years, that works out to about $45k less home loan capacity. You can owe $0 and still have that limit counted.

Your result could be higher or lower than $45k, because lenders calculate this differently and other limits may apply.

We can check whether reducing or closing the card changes your result before you do it. Our borrowing power guide explains the worked example, and how much home can I afford puts it alongside your deposit and household budget.

These amounts are part of the home loan assessment. Your credit-card statement sets out your actual payment obligations. We can compare reducing an unnecessary limit with keeping access to funds you genuinely need.

Car loans, personal loans and HECS or HELP debt also need their own assessment. Before paying one out, check what that leaves for your deposit and buying costs. Do not take out new credit to make your savings balance look stronger.

If your budget is below the benchmark, explain why and keep the evidence. Shared costs or an employer-paid expense may explain the difference. The lender can still ask questions even if it uses a higher figure.

We can compare suitable banks using the same accurate information. You should be able to see whether the difference comes from income, living costs, debts or another lending rule. The income and employment hub covers the other side of that calculation.

Use our extra repayment calculator for a separate repayment estimate. It does not calculate a lender's borrowing limit.

How are we paid? We generally receive commission from the lender when your loan settles and while it remains open. We explain any fees and commissions before you proceed.