Household Expenditure Measure (HEM) Explained

Obtaining a home loan is a major investment, and in most cases, it is generally one of the biggest that you will make in your lifetime.

It is also a process that can be long and quite complex. When applying for a mortgage, lenders will want a full financial profile including your income, savings, deposit amount, and expenses to determine your borrowing power.

To make a thorough assessment of your current financial situation and to determine if you can meet the loan repayments, lenders will use combination of methods to stress test your finances, these include:

• Review bank statements
• Request a self-assessment of your living expenses
• Adjust expenses to match bank account history
• Compare against the Household Expenditure Method (HEM)

What is the Household Expenditure Measure (HEM)?

The purpose of a Household Expenditure Measure (HEM) is to provide a consistent measure of household financial wellbeing across the country.

The Household Expenditure Measure (HEM) uses data gathered from a survey conducted by the Australian Bureau of Statistics called the Household Expenditure Survey (HES). Completed every six years, the HES analyses the household expenditure patterns of all working and non-working Australians, looking at the amount of disposable income available, as well as the amount of debt and assets they hold.

It considers all the different types of expenditure that households make such as food, transport, housing (rent or mortgage), health, electricity, insurances, clothing, expenses on entertainment and other living costs, factoring in over 600 points of data. The data collected is then used by the Australian Government to inform policy decisions on welfare, taxation, and other areas of expenditure.

How do lenders use the HEM?

Utilised by an estimated 80% of Australian lenders the household expenditure measure (HEM) is a benchmarking tool used by lenders to assess a borrower’s capacity or ability to service a loan. This is done by analysing your household size, your income and whether you are living in a metro area or non-metro area to determine your actual living expenses. In summary, the HEM model considers the entire households living expenses versus the household’s income to determine if a loan can be serviced / repaid.

What are HEM expenses?

Household Expenditure Measure (HEM) factors in expenses such as:

• Childcare / Nanny Fees / After School Care etc
• Insurances: Car, life, health, home and contents etc
• Recreation: festivals, concerts, take-away meals, sporting matches
• Transports: public transport, car registration, petrol, servicing, repairs, car share ride
• Groceries: monthly grocery bills
• Personal Care / Clothing: shoes, clothing, care products and cosmetics
• Subscriptions: mobile, internet, streaming services, and any other subscriptions such as monthly magazine subscriptions / beauty boxes
• Education: Uniforms, school shoes, textbooks and all associated school fees
• Investment property expenses: rates, maintenance, utilities etc
• Medical Expenses: doctor, dentist, optometry, medications etc
• Any other regular expenses that are ongoing.

Remember: It is important to ensure that all expenses are factored in when providing a financial profile as incorrect reporting can affect your borrowing power.

Consulting your mortgage broker or lender before starting the home loan application process to ensure you understand your borrowing capability and finding the best loan for your personal needs and budget is always a good idea.

For assistance with gaining an accurate assessment of your living expenses contact us today to get started.