HEM Calculator: How It Affects Your Home Loan Borrowing Power

A HEM calculator can help you understand how household expenditure benchmarks may influence the amount a lender is prepared to let you borrow. While your income matters, lenders also look at your expenses, debts and other financial commitments when assessing whether you can comfortably service a home loan.

Household spending plays an important role in this assessment. The more income committed to regular expenses, the less may be available for mortgage repayments, which can affect your borrowing power. APRA also identifies household expenses as a key part of assessing a borrower’s ability to meet repayments.

This is why an estimate from a home loan calculator may differ from a lender’s assessment. Understanding how HEM fits into the process can give you a clearer idea of what lenders consider when reviewing your application.

What is an HEM Calculator?

The Household Expenditure Measure (HEM) calculator is a tool used by lenders to estimate a person’s minimum living expenses. Rather than relying on self-reported data from the loan applicant (which may lead to over- or underestimating living costs), the HEM living expenses calculator uses standardised benchmarks to create a more objective assessment.

Accurately assessing living expenses is a crucial part of the mortgage application process, because it determines whether or not you’ll be able to service the loan. Most lenders now use the HEM model as their preferred method of calculation, because it ensures consistency and reduced risk for the lender.

How Does the HEM Calculator Work?

HEM provides a household expenditure benchmark based on factors including household type, income category and location, with household composition reflecting circumstances such as couples, singles and dependent children. It is not designed to represent your personal household budget. Instead, it gives lenders a reference point when assessing the expenses you declare as part of your home loan application.

Where a lender uses HEM as part of its serviceability assessment, it may compare the household expenses you declare with an appropriately scaled HEM benchmark. APRA’s guidance for ADIs is that, where HEM or HPI is used, prudent practice is to use the greater of the borrower’s declared living expenses or the appropriately scaled benchmark.

For example, consider two couples earning similar combined incomes. One couple has two dependent children while the other has no dependants. Even with comparable incomes, their household circumstances and actual expenditure could result in different expense assessments. This can affect how much income each household is considered to have available for mortgage repayments.

What Expenses Can Affect Your Home Loan Assessment?

When assessing a home loan application, lenders consider your living expenses to understand how much of your income is already committed to running your household. Common expenses include:

• groceries and household goods
• utilities, internet and phone services
• transport and vehicle costs
• medical and healthcare costs
• education and childcare
• insurance
• recreation and entertainment

These household costs are different from financial commitments such as credit cards, car finance, personal loans and existing mortgages. Both can affect how much income you have available for mortgage repayments.

APRA notes that household expenses are an important part of assessing a borrower’s ability to meet repayments. Its guidance also states that lenders using HEM or a similar expenditure index should consider the greater of the borrower’s declared expenses or an appropriately scaled benchmark.

This means reporting unusually low expenses does not necessarily result in those figures being used. The HEM calculator provides a benchmark, but lenders can also consider your declared expenses, financial commitments and their own lending policies when assessing your application.

How HEM Can Affect Your Borrowing Capacity

Your income is only one part of determining how much you may be able to borrow. Lenders also consider your assessed household expenses and existing financial commitments to estimate how much income remains available for mortgage repayments.

Put simply, the assessment generally follows this relationship:

Income → assessed expenses and commitments → available income for repayments → potential loan amount

Higher household expenditure can leave less income available to service a new mortgage. Household size and the number of dependants can also influence the assessment. Existing commitments such as credit cards, personal loans, car finance and other mortgages may further affect the result.

For example, one applicant may earn $130,000 a year but have higher household expenses, dependants and several existing credit commitments. Another may earn $110,000 but have fewer expenses and commitments. The higher-income applicant would not automatically qualify to borrow more.

This is why borrowing capacity depends on your wider financial circumstances rather than salary alone. A HEM calculator helps lenders assess the household expenditure component, while other factors are considered as part of the broader serviceability assessment.

HEM Is Only One Part of Home Loan Serviceability

While the HEM calculator helps lenders estimate household expenditure, it does not determine how much you can borrow on its own. A lender will usually assess several aspects of your financial position to determine whether you can comfortably meet the proposed repayments.

These can include:

• your verified income
• existing debts and repayments
• credit card limits
• the number of dependants in your household
• other ongoing financial commitments
• the proposed loan amount and loan term
• applicable serviceability buffers
• the lender’s own credit policies

These factors also help explain why two lenders can assess the same borrower differently. Each lender may have its own serviceability model and policies for assessing income, expenses and existing commitments. NBHL’s existing content similarly highlights how different lender calculators and rules can produce different borrowing outcomes from the same financial information.

The key takeaway is that a serviceability result from one lender does not necessarily predict the result you will receive from another.

Why Online Borrowing Estimates Can Be Different

An online home loan calculator can be useful when you are researching your options, but the result may differ from what a lender ultimately determines. This is because online tools generally provide an indicative estimate based on the information you enter and may rely on simplified assumptions.

An online estimate may:

• use the income and expense information you provide
• rely on general assumptions about your circumstances
• provide an indicative figure for initial planning

A detailed lender assessment may:

• verify your income
• assess household expenditure
• consider liabilities and credit limits
• account for your household circumstances
• apply serviceability requirements and lender-specific policies

The HEM calculator may form part of this more detailed assessment by providing an expenditure benchmark. However, it is not the only factor a lender considers.

Online estimates can be helpful for setting expectations and exploring different scenarios. They should not be treated as confirmation that you will qualify for a particular loan amount. A lender will need to assess your individual circumstances before making a lending decision.

How to Prepare Your Finances Before Applying

Understanding your financial position before applying can help you set a realistic property budget and prepare the information a lender may need. Rather than trying to make your expenses appear lower, focus on developing an accurate picture of what comes in and what goes out each month.

1. Review your actual spending: Check recent bank and credit card statements to see what your household genuinely spends.
2. Create a realistic budget: Separate essential costs from discretionary spending. This can show how much room you have after meeting regular commitments.
3. Review existing credit commitments: Take stock of credit card limits, personal loans, car finance and other debts. These commitments may be considered during a lender’s serviceability assessment.
4. Check recurring expenses: Look for subscriptions, memberships and other ongoing payments that can be easy to overlook.
5. Keep your information accurate: Provide a realistic account of your expenses when applying. Deliberately understating expenditure does not provide a reliable picture of what you can comfortably afford.
6. Allow for a financial buffer: Mortgage repayments are not the only cost of owning a home. Council rates, insurance, maintenance and unexpected costs can place additional pressure on your household budget.

The goal is not simply to qualify for the largest possible loan. A manageable mortgage should leave enough room in your budget for homeownership costs and everyday life. This reflects NBHL’s existing guidance to buyers to maintain a financial buffer rather than stretching their budget to the maximum.

What HEM Means for Your Borrowing Power

HEM gives lenders a standardised benchmark for estimating household expenditure, but it does not determine the outcome of a home loan application on its own. Your income, actual expenses, existing debts and household circumstances can all contribute to the broader serviceability assessment.

Lender policies and assessment methods can also vary, which means the same financial circumstances may produce different results across lenders. Understanding your regular expenses and financial commitments before applying can therefore give you a more realistic picture of your borrowing power and help you approach the home loan process with clearer expectations.

Talk to North Brisbane Home Loans About Using an HEM Calculator

With an HEM calculator, you can gain valuable insights into how lenders will assess your potential loan eligibility and make informed decisions about your financial future. However, even the most nuanced calculator can’t offer personalised financial advice.

So, for expert advice tailored to your situation, contact North Brisbane Home Loans. We can help you to accurately assess your borrowing capacity, explore loan possibilities and ensure a smooth application process. Don’t let uncertainties hold you back from your dream home. Contact North Brisbane Home Loans today and take the first step towards homeownership with us.

HEM Calculators FAQs

Is the HEM figure updated over time?

Yes. HEM is not intended to be a permanently fixed benchmark. APRA’s current residential mortgage lending guidance says lenders using HEM or similar indices should update them frequently or at least in line with published updates, which are typically quarterly. This helps ensure the expense benchmark used in lending calculations does not remain based on outdated expenditure data.

Can a lender use my declared expenses if they are higher than HEM?

Yes. APRA’s guidance for authorised deposit-taking institutions states that lenders should use the greater of a borrower’s declared expenses or an appropriately scaled HEM or HPI benchmark. This means HEM should not simply override higher actual expenditure. If your genuine household spending is above the relevant benchmark, that higher expenditure can be important to the serviceability assessment.

Does HEM include my existing loan and credit card repayments?

HEM relates to household expenditure and should not be viewed as a substitute for assessing your existing debts. APRA separately expects lenders to have procedures for verifying existing debt commitments and taking reasonable steps to identify undeclared debts. This distinction matters because a household expense benchmark does not give a lender the complete picture of your existing financial obligations.

What happens if I currently have very low housing costs?

Having little or no current housing expenditure does not necessarily mean a lender will assume those costs will remain at zero. APRA gives the example of a borrower living with friends or relatives and says prudent lenders should include a reasonable estimate of housing costs where appropriate. This helps the assessment account for expenses that may arise or change after the loan is taken out.

Does HEM account for a high-income household spending more?

It can be relevant. APRA notes that basic expenditure indices may not always accurately represent a borrower’s actual spending. Its guidance says that where HEM or HPI is used, a prudent lender should apply a margin linked to the borrower’s income. As a result, borrowers should not assume that the same basic expenditure benchmark will necessarily be applied regardless of income.

Can I reduce my spending before applying for a home loan?

A genuine and sustainable reduction in spending can be relevant, but simply saying that you plan to spend less does not automatically change a lender’s assessment. ASIC’s responsible lending guidance specifically addresses how proposed spending reductions may be considered when assessing a consumer’s financial situation. The circumstances and whether the reduction is realistic can therefore matter.