How an HEM Calculator Can Help Determine Living Expenses and Home Loan Possibilities

Whether you’re a first home buyer, a home upgrader or a seasoned property investor, understanding your borrowing capacity is crucial. Why? Because borrowing capacity will have the final say in establishing your budget.

Many borrowers may be unaware that lenders use a specific calculator to determine how much they think you can afford to borrow. It’s called the HEM calculator, and it plays a crucial role in the loan application process.

 

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 an HEM Living Expenses Calculator Work?

To begin with, items from the ABS Household Expenditure Survey are classified as necessity, discretionary (e.g. takeaway food) or luxury expenses (e.g. overseas holidays). The calculator then uses this information to calculate a person’s essential living expenses, including:

 

• • Basic Necessities: This includes everyday essentials such as food, clothing and transportation costs.

  
  

  • Healthcare: This includes doctor’s visits, medication costs, dental expenses and optical costs.

  
  

  • Bills: HEM will factor in utility bills, phone bills and internet connectivity services.

  
  

  • Ongoing Financial Obligations: This may include insurance premiums, plus any other ongoing financial obligations such as personal loans or credit card repayments.

  
  

  • Childcare and Education: For those with dependents, education and childcare costs play an important role in the final HEM calculation.

 

The Household Expenditure Measure calculator will determine a person’s “essential expenditure” cost based on their location, income and number of dependents.

 

Benefits of Using a Household Expenditure Measure Calculator

What are the advantages of using a Household Expenditure Measure calculator when applying for a home loan? The calculator:

 

1. 1. Provides a more objective assessment of living expenses.

   
   

   2. Ensures consistency across different applicants, leading to fairer lending practices.

   
   

   3. Produces more accurate estimates of living expenses.

   
   

   4. Allows borrowers to make more informed decisions.

   
   

   5. Creates a more streamlined application process.

   
   

   6. Reduces lending to borrowers who are at risk of defaulting on the loan.

   
   

   7. Ensures greater transparency and fairness for borrowers.

 

Overall, using an HEM living expenses calculator can be beneficial for both borrowers and lenders.

 

Understanding Home Loan Possibilities Based on HEM Living Expenses

 

Using this calculator can help you to gain a better understanding of your potential borrowing capacity. For example, a couple with no children and a combined annual income of $95,000 would spend an average of $2,990 per month on living expenses (according to an HEM expenses calculator). Because of this, they could be eligible to borrow up to $462,721 with a 6.18% interest rate.

In contrast, a couple with the same combined income, plus 3 dependent children, would have their living expenses calculated at $3,953 per month. This could reduce their potential borrowing capacity to $344,939 (a significant difference).

It’s also important to understand the extra expenses most lenders will include on top of the the Basic HEM calculations. Expenses like Private Health, Private School Fees and Child Maintenance payments can make a big difference to what available income is left over to assist with meeting a loan payment each month. Talking with a Mortgage Broker to understand how your individual finances will affect loan approval will set you up for success.

 

What Factors Influence Your HEM Estimate?

While the HEM living expenses calculator is based on national spending data, your personal circumstances still play a key role in determining your borrowing power. When lenders use a HEM calculation, they look at household type (single, couple, family), income bracket and location (metro or regional). So, a couple living in suburban Brisbane will have different estimated expenses compared to a single applicant in a rural area.

The HEM is designed to standardise how lenders assess living expenses, but it’s not a one-size-fits-all solution. It’s simply a benchmark – based on household surveys – that helps lenders make responsible lending decisions. Still, your real financial habits may vary significantly from what the benchmark assumes.

 

Breakdown of Expenses: Included vs Excluded

To get a better sense of how HEM works, it’s worth breaking down what kinds of costs are factored in – and what’s left out.

 

Expenses included in the HEM calculator:

 

• • Food and groceries

  
  

  • Utility bills (electricity, water, gas)

  
  

  • Phone, internet and basic tech services

  
  

  • Transport (fuel, registration, maintenance)

  
  

  • Childcare, healthcare and insurance premiums

  
  

  • Schooling and essential education

  
  

  • Basic clothing and household items

 

 

Expenses included in the HEM calculator:

 

• • Mortgage or rent repayments

  
  

  • Discretionary spending like entertainment and travel

  
  

  • Private education fees

  
  

  • Debt repayments (e.g. credit cards, personal loans)

  
  

  • HELP/HECS debts

  
  

  • Superannuation contributions

 

Because the HEM doesn’t account for all outgoings, lenders will often ask for bank statements to cross-check declared expenses. This helps them calculate monthly living expenses easily and ensure your estimated spending lines up with actual behaviour.

 

How Lenders Apply HEM in Practice

 

In most cases, lenders will compare your self-declared living expenses to the applicable HEM benchmark and use the higher of the two. For example, if you state your monthly expenses are $2,200, but the HEM calculation suggests $2,500 for your household type and income level, the lender will apply the $2,500 figure.

This process is designed to prevent underestimating living costs – but it also means that borrowers with frugal lifestyles may be assessed using figures that don’t fully reflect their spending habits. Lenders also review your bank transactions (typically over the past 3 months) to identify any discrepancies.

 

Common HEM Levels: Basic, Moderate, Lavish

When lenders apply their HEM benchmark, they’ll usually assign a lifestyle level to match your income and situation. These levels help define what types of spending are assumed under the HEM:

 

• • Basic – Covers only essential costs; assumes minimal discretionary spending.

  
  

  • Moderate – Allows for modest extras like dining out, subscriptions and occasional entertainment.

  
  

  • Lavish – Assumes a higher-spending lifestyle with regular luxuries.

 

If you’re on a higher income, lenders may automatically assign a moderate or lavish HEM level – even if your real-life spending is more conservative. This can affect your borrowing power, as higher assumed expenses reduce your loan servicing capacity.

 

Tips to Improve Accuracy & Borrowing Power

Want to ensure your home loan application reflects your true financial position? Here are a few practical steps you can take before applying for a home loan:

 

 

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.