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:
- Provides a more objective assessment of living expenses.
- Ensures consistency across different applicants, leading to fairer lending practices.
- Produces more accurate estimates of living expenses.
- Allows borrowers to make more informed decisions.
- Creates a more streamlined application process.
- Reduces lending to borrowers who are at risk of defaulting on the loan.
- 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.
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.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
