HEM Explained: How Lenders Estimate Expenses

Key takeaways

• Lenders use the HIGHER of declared expenses and the HEM benchmark.
• HEM scales with income, household size and location.
• It covers ordinary living costs, not debt repayments or rent in all cases.
• Declaring unrealistically low expenses does not help and damages credibility.

What is HEM and where does it come from?

The Household Expenditure Measure is a benchmark derived from Australian Bureau of Statistics household expenditure data, constructed to represent a modest but reasonable level of spending. It scales by income band, number of adults, number of dependants and location.

It is deliberately not an average. It is closer to a floor - a level of spending below which a household of that composition is unlikely to be living. That is why it functions as a sense-check rather than an estimate of what you actually spend.

Before the Royal Commission, some lenders effectively used HEM as a substitute for asking. Verification practice has tightened substantially since, and declared expenses are now checked against transaction data rather than accepted at face value.

How does it affect your borrowing capacity?

Directly, because expenses reduce the surplus income available to service a loan. The assessment runs roughly like this.

The consequence people find counterintuitive is that declaring very low expenses achieves nothing. If you declare below HEM, HEM is used. If you declare above HEM, your figure is used. The declaration can only ever reduce your capacity, never increase it.

What should you actually do?

Declare honestly, and reduce genuinely.

• Be accurate. A declaration well below what your statements show creates a credibility problem across the whole application.
• Genuinely reduce discretionary spending for the three months before applying. This works because it changes what the statements show, not because it changes what you write down.
• Separate one-offs. A holiday or a medical expense in the assessed period can be explained, and should be, rather than left to be read as recurring.
• Reduce credit card limits, which are counted at the limit regardless of balance.
• Clear buy-now-pay-later accounts and close them - they are visible and they count.

Understand what HEM does not cover: it generally excludes debt repayments, and its treatment of rent and some other items varies by lender. Those are assessed separately, so do not assume they are already inside the benchmark.

Frequently asked questions

What is HEM?

The Household Expenditure Measure, a benchmark of modest household spending derived from ABS expenditure data and scaled by income, household composition and location. Lenders use it to sense-check declared living expenses.

Can I declare lower expenses to borrow more?

No. Lenders apply the higher of your declared expenses and the HEM benchmark, so declaring below the benchmark achieves nothing. It also creates a credibility problem when your statements show otherwise.

Does HEM include rent?

Treatment varies by lender and by HEM version. Rent and debt repayments are commonly assessed separately from the living expense benchmark, so do not assume they are already included.

How can I improve my expense position before applying?

Genuinely reduce discretionary spending for the three months before you apply, since statements are verified. Also reduce or close unused credit card limits and clear buy-now-pay-later accounts, which are counted against you.

Related reading

• The Borrowing Power Formula: Income, HEM, Buffers and Debts
• Why Borrowing Power Varies $200,000 Between Lenders
• The Home Loan Documents Checklist

Sources

• Household Expenditure Survey — Australian Bureau of Statistics
• Credit licensing: Responsible lending conduct (RG 209) — ASIC