Written byThe Household Expenditure Measure (HEM) is a benchmark of basic living costs, by household type, location and income, that lenders use as a floor when assessing serviceability.
Also known as: HEM, Household Expenditure Measure, HEM benchmark, HEM living expenses
Key points
- It is produced by the Melbourne Institute at the University of Melbourne from ABS spending data and updated every quarter with the CPI.
- Lenders compare your declared living expenses with the HEM figure for a household like yours and use the higher of the two.
- It is deliberately modest: typical spending on necessities plus a frugal allowance for extras, and most people's bank statements show more.
- Under the responsible lending obligations a benchmark cannot replace checking actual expenses, so lenders still read bank statements.
How the HEM is built
The Melbourne Institute builds the measure from the ABS Household Expenditure Survey, then rolls it forward each quarter using the consumer price index. It estimates the median spend on basic necessities such as food, utilities, transport and children's costs, and a low percentile of spending on discretionary basics such as takeaway and entertainment, for each combination of household type, location and income band.
The result is a table rather than a single number. A single renter in regional Queensland gets a different figure from a couple with three children in Sydney, and both figures rise with income, on the basis that higher earners spend more even on the basics. Lenders subscribe to the table and load it into their assessment systems.
How lenders use it
When you apply for a home loan, car loan or personal loan you declare your living expenses. The lender looks up the HEM figure for your household and uses whichever is higher. HEM is a floor, so understating your expenses does not lift your borrowing capacity; it just gets replaced with the benchmark.
If your bank statements show spending well above HEM, the lender is expected to use that, and since the Royal Commission and regulator guidance, most do. Expenses that are clearly temporary or that will stop once the loan settles, such as rent when buying a first home, can be explained, but the explanation has to be credible and documented.
What it means for your application
The practical effect is that your borrowing capacity is set by your income, your existing debts and the higher of your real expenses or HEM, with a buffer on top for rate rises. Because HEM is modest, the benchmark itself is rarely what limits a loan; large discretionary spending visible in statements, or debts such as credit card limits and buy now pay later, usually matter more.
For a broker the job is presenting expenses accurately and explaining anything unusual before the assessor finds it. For a borrower it is simpler. Declared expenses get checked against statements, so an honest figure saves questions, and the spending in the three months before an application is the spending the assessor sees.
Example
A paramedic in Tamworth applies for a car loan and, wanting to look frugal, declares living expenses well below what she actually spends. The lender's system replaces her figure with the HEM benchmark for a single parent on her income, so the low estimate gains her nothing. Her bank statements then show rent and childcare above the benchmark, and the assessor uses those actual figures instead. Her borrowing capacity comes out lower than she expected, but still comfortably covers the car she wants, and the application clears without the back and forth an unexplained gap would have caused.
Not to be confused with
- Serviceability
- serviceability is the whole affordability test, while HEM is one input into the expense side of it
- Credit score
- a credit score reflects repayment history, while HEM is about the cost of living
Frequently asked questions
What does HEM stand for?
Household Expenditure Measure. It is published by the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne, based on the ABS Household Expenditure Survey and updated each quarter in line with the consumer price index. Australian lenders use it as a benchmark for living expenses when assessing loan applications.
Do lenders use HEM or my actual expenses?
Whichever is higher. If you declare less than the HEM figure for a household like yours, the lender substitutes HEM. If your declared or documented expenses are higher, the lender uses those. Regulator guidance says a benchmark cannot replace reasonable checks of your real spending, so bank statements are usually reviewed as well.
Is HEM the same for everyone?
No. The figure varies by household type, from a single person to a couple with several children, by where you live, and by income band, with higher earners assigned higher benchmarks. Two applicants with the same income can be assessed against quite different HEM figures if their households or locations differ.
Why is my borrowing capacity lower than I expected?
Usually because the expenses in the assessment are higher than the ones you had in mind. Discretionary spending visible in bank statements, existing commitments such as credit card limits and buy now pay later, and the buffer lenders add for rate rises all pull the number down. A rough online calculator rarely captures all three.
Does HEM apply to car loans and personal loans?
Yes. Any consumer loan assessed under the responsible lending rules involves an expense check, and most lenders use HEM or a similar benchmark as the floor for car loans, personal loans and home loans alike. Business finance is assessed differently, on the business's figures, although a sole trader's household costs still come into it.
Related terms
Serviceability
Serviceability is a lender's test of whether you can afford the repayments on a loan from your income, after living costs, existing debts and a rate buffer.
Read definitionResponsible lending obligations
Responsible lending obligations are duties under the NCCP Act that require lenders and brokers to inquire into and verify a consumer's finances and not provide or suggest unsuitable credit.
Read definitionAffordability
Affordability is whether a person or household can meet the cost of a good, service or loan repayment without giving up essentials or taking on debt they cannot sustain.
Read definitionBank statement
A bank statement is a record from your bank listing every deposit, withdrawal and fee on an account, with the running balance for the period.
Read definitionCredit score
A credit score is a number calculated from your credit report that tells lenders how likely you are to repay, based on your borrowing history.
Read definitionABS
The ABS is the Australian Bureau of Statistics, the independent national agency that produces Australia's official figures on inflation, jobs, spending and population.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.