What is the Household Expenditure Measure?
The Household Expenditure Measure (HEM) is a standard benchmark that some banks and lenders use to estimate a person’s annual living expenses when considering their home loan application. This can help the lender assess their borrowing capacity or whether they can afford to repay a home loan.
A lender may also use the HEM to assess if an applicant has accurately reported their living costs. If you tell your lender your essential spending is, say, $200 a week, but the HEM suggests you’d need to spend $500 a week on groceries and bills, it might ask you for more information on your outgoings.
How does the HEM work?
Developed by the Melbourne Institute, the HEM classifies more than 600 items in the Australian Bureau of Statistics’ Household Expenditure Survey as absolute basics, discretionary basics, or non-basics:
- Absolute basics: most food items, kids clothing, utilities, transport costs, and communications.
- Discretionary basics: takeaway food, restaurants, alcohol, clothing, and entertainment.
- Non-basics: luxury services such as overseas holidays.
HEM reflects median spend on absolute basics plus the 25th percentile spend on discretionary basics.
The HEM does not consider every outgoing expense, such as:
- Rent
- Mortgage repayments
- Education fees
- Private health insurance
- Life insurance
Though, lenders generally add these expenses into their own calculations.
Why are living expenses important in a home loan application?
Whenever a person applies for a home loan, lenders are required by law and under responsible lending regulations to consider their living expenses. Doing so provides a fuller picture of their financial situation and whether they’ll be able to pay back the loan.
One tool lenders to do this is the HEM, which serves as a benchmark figure. Lenders are also expected to make separate inquiries about a borrower’s current income and expenses.
In fact, solely using the HEM has been criticised amid concerns people were being approved for loans they couldn’t afford to repay. That’s because there can be a stark difference between borrowers’ estimated and actual expenses. A borrower could struggle to meet their repayments after being approved for a home loan if their living expenses (including non-essential items) were underestimated.
Looking back, the 2017 Banking Royal Commission revealed one of Australia’s largest banks made shortcuts in loan approvals, leading living expenses to be underestimated in some cases. The Commission also found the HEM was more useful to assess borderline borrowers and concluded it didn’t show the full picture of a borrower’s income and liabilities.
What living expenses are considered in a home loan application?
Some common living expenses you may need to provide an estimate of in a home loan application could include:
- Groceries
- Childcare
- Costs related to children and pets (childcare, sports, tuition, pet expenses)
- Transportation costs
- Clothing, fitness, and personal care costs
- Utility costs, like internet, energy, and phone bills
- Education costs (including HECS repayments)
- Entertainment and recreation spending
- Medical costs
- Other regular outgoing expenses
