The Household Expenditure Measure (HEM) is a Melbourne Institute living expenses benchmark that lenders compare with a borrower’s declared expenses. Most lenders use the declared figure or their applicable HEM benchmark, whichever is higher, for the expenses covered by that benchmark. Costs outside that comparison still count in serviceability.
What HEM Means in a Home Loan Assessment
HEM measures modest household spending and helps lenders assess whether a client’s living expense declaration is plausible. In finance, HEM stands for Household Expenditure Measure. Your client’s own budget records their individual spending. HEM supplies a statistical comparison drawn from other households.
A client can genuinely spend below HEM and still have the lender apply a higher assessment figure. Reducing the declaration below that floor will not improve the calculator result. Keep the client’s actual declaration and the lender’s assessed amount separately identifiable in your file.
HEM is one input to loan serviceability. The lender also considers income and financial commitments before deciding how much the client can borrow.
How HEM is Calculated
HEM combines median spending on absolute basics with spending at the 25th percentile on discretionary basics. The median is the middle observation. The 25th percentile is the point below which one quarter of observations fall.
The Melbourne Institute’s methodology classifies Australian Bureau of Statistics Household Expenditure Survey items into spending groups. Groceries and children’s clothing are examples of absolute basics. Eating out and entertainment are discretionary basics. Rent and mortgage payments sit outside this net-of-housing measure.
The Institute’s quarterly HEM updates adjust survey spending for expenditure-specific inflation after the quarterly Consumer Price Index becomes available. Estimates differ by household type, location and income category.
For an application, the relevant inputs include the number of adults and dependants, the gross income band and the household’s location. State and metropolitan or regional classification affect which estimate applies. A single person in metropolitan Victoria belongs to a different household group from a couple with two children in regional Queensland. There is no single HEM figure for everyone in Victoria.
Reading a HEM Table
A HEM table matches household characteristics to a spending estimate, with different rows or bands for different circumstances. The Melbourne Institute distributes quarterly reports by subscription through Perpetual. Its licensed tables are therefore different from a free public HEM table PDF containing estimates or historical figures.
The following invented amounts show how to read bands. They are illustrative monthly figures, not current HEM values, official income bands or lender policy.
| Illustrative Household | Dependants | Illustrative Gross Annual Income Band | Illustrative Monthly Benchmark |
|---|---|---|---|
| Single person, metropolitan Victoria | 0 | $60,000 to $89,999 | $2,000 |
| Single person, metropolitan Victoria | 0 | $90,000 to $119,999 | $2,300 |
| Couple, metropolitan Victoria | 0 | $90,000 to $119,999 | $3,100 |
| Couple, regional Queensland | 2 | $90,000 to $119,999 | $4,000 |
Compare the first two rows to isolate the illustrative income effect. The last two rows change several inputs, so their difference cannot be attributed to location alone. Use the household inputs in the shortlisted lender’s calculator to obtain the assessment figure for an application.
Declared Expenses Against the HEM Benchmark
The higher-of comparison applies to equivalent expense categories. Compare declared expenses covered by the benchmark with that benchmark, then account for additional costs separately.
In a hypothetical case, a lender’s applicable benchmark is $3,000 per month. A $2,600 declaration produces a $3,000 assessed amount for those categories. If the client declares $3,400, the higher amount used is $3,400. Additional commitments remain payable in either case.
Rent that continues, private school fees and debt repayments require separate treatment. Health and life insurance also need attention. Childcare and general insurance are not universally excluded from HEM: the Australian Securities and Investments Commission (ASIC) lists childcare and home, contents and vehicle insurance among absolute basics. Map each cost to the lender’s categories to avoid counting it twice.
ASIC explains in RG 209, Credit licensing: Responsible lending conduct that benchmarks cannot verify an individual consumer’s expenses. Inquiry into actual spending still matters. RG 209 also permits a verified below-benchmark amount for responsible lending purposes. A lender’s credit policy can impose a higher floor.
In ASIC v Westpac, the Federal Court dismissed ASIC’s case. The judgment addressed Westpac’s assessment process, including its separate use of declared expenses. The Full Federal Court rejected ASIC’s appeal by a two-to-one majority, and ASIC did not seek a further appeal. That outcome does not remove inquiry and verification duties.
What a HEM Calculator or Living Expenses Calculator Shows
A lender’s serviceability calculator usually contains its applicable expense benchmark and uses the applicant details to select it. A public HEM calculator cannot reliably reproduce a particular lender’s licensed figures and assessment rules from household details alone.
Give clients Moneysmart’s budget planner when they need a living expenses calculator. It helps them record their own income and spending, including irregular costs. Convert annual bills to monthly amounts before comparing totals.
A household expenses calculator records what the client spends. The lender’s calculator applies the expense amount required by that lender’s assessment rules. A detailed monthly budget supports the declaration, but it does not override a lender’s benchmark floor.
How Lenders Differ in Applying HEM
Lenders can apply different income adjustments and expense classifications, which change the amount used in serviceability. The Australian Prudential Regulation Authority (APRA) expects banks to compare declared expenses with an appropriately scaled HEM or Henderson Poverty Index benchmark. Its residential mortgage lending guidance describes an income-linked margin where those indices are used.
Some lenders use HEM with a loading. Others use another benchmark or their own assessment approach. A shared HEM label does not establish identical expense treatment.
For a concrete example, Macquarie’s calculator guidance separates general living expenses from additional living expenses. Private health insurance and private school fees go in the additional group. Only general living expenses enter the HEM comparison. Macquarie requires three months of bank statements when general living expenses fall below HEM.
Before quoting a borrowing amount, compare the assessed living expenses and additional commitments in each shortlisted calculator. The same declaration can produce different results across lenders. Also assess the separate debt-to-income limit and HELP repayment treatment.
Preparing Living Expenses Before Lodgement
Collect a categorised expense declaration and statements that support it before lodging the application. Match the declaration to the selected lender’s categories, including costs paid through credit cards or another account.
- Reconcile transaction and credit card statements with the declaration. Account for annual bills and avoid counting a credit card purchase again when the card repayment leaves the transaction account.
- Explain any below-HEM declaration. If shared housing reduces costs, record the client’s share and retain evidence of the arrangement. Note whether it continues after settlement.
- Separate costs that continue from costs that end. For rent ending when the client moves into the purchased home, document the move and any overlap. Include the new property’s ongoing costs.
- Record proposed spending reductions by category. Explain what the client will stop and why the change is achievable. A plan to cancel subscriptions needs a different assessment from a plan to reduce necessary medical spending.
- Save the final declaration and calculator result with your file note. Identify the evidence reviewed, the reason for adjustments and the assessed expense total used for the recommendation.
Keep the responsible lending assessment consistent with that evidence. Before lodgement, confirm that every ongoing cost appears once in the relevant calculation and that the quoted borrowing amount uses the lender’s assessed expenses.
