Explore Home Loans

James HurwoodWritten by James Hurwood
Reviewed by Stephen Zeller
Last updated 27/11/2023

Key takeaways

  • The Household Expenditure Measure (HEM) is a benchmark used by many lenders as part of the home loan approval process
  • It lets a lender compare the applicant’s spending to see whether they spend more or less than the average consumer
  • This helps give the lender a better picture of an applicant’s spending habits, and their capacity to repay a home loan
  • It’s not the only thing that lenders use when assessing an applicant; just a component of their overall assessment process

Stephen Zeller, General Manager

Expert tips for understanding the HEM

As General Manager of Money at Compare the Market, Stephen Zeller is invested in arming consumers with the knowledge they need to apply for a home loan with confidence, including understanding the HEM and how it factors into a home loan application. Here are his top HEM tips:

Note one-off expenses

A lender will generally want to review your living expenses via your account statements. When preparing your statements for review, have a look through them yourself and note anything you see as being a one-off expense. This could be an emergency visit to the dentist, some new turf for your home or something else you wouldn’t expect to pay frequently. By not clarifying one off expenses in your statements, you may be artificially inflating your average monthly expenditure and reducing your overall borrowing power; so don’t sell yourself short!

The process is for your own benefit

It can feel a bit invasive having a broker or lender look through your statements and querying your living expenses, but this is the same process that most customers go through when applying for a home loan. Just remember – this is all to make sure you can afford the proposed home loan on top of your current living expenses. So it’s for your benefit really!

We’re here to help!

Our Home Loan Specialists know what to look for when assessing your living expenses. If you’re unsure of what your average living expenses are and don’t have the time to comb through every transaction in your statements, our Home Loan Specialists can help collate these and present the details of the statements to the lender to assist with a faster loan approval.

The HEM explained

household expenditure measure spending visualisation

What is the Household Expenditure Measure (HEM)?

Developed and published as a quarterly report by economic research group the Melbourne Institute, the Household Expenditure Measure is essentially a figure that represents the average amount of money different types of households spend on what are considered to be ‘basic’ expenses, as opposed to their total living costs.¹

Banks and lenders use the HEM as a benchmark to get a picture of how much money mortgage applicants are spending compared to other borrowers in similar demographics and income brackets.

The HEM uses local survey data linked to the Consumer Price Index (CPI) as well as over 600 items from the Australian Bureau of Statistics’ (ABS) Household Expenditure Survey, categorising them as:

  • Absolute basics, including essentials like most food items, children’s clothing, utilities, transport costs and communications.
  • Discretionary basics, which covers non-essential but fairly ‘everyday’ costs like take-away food, restaurants, confectionery, alcohol and tobacco, clothing, childcare and entertainment.
  • Non-basics, which covers luxuries like overseas holidays and gardening services.

It’s assessed against eight different household types, based on factors including relationship status and number of dependants. The eight household types are:

  • Single households without children
  • Couple households without children
  • Single households with one child
  • Couple households with one child
  • Single households with two children
  • Couple households with two children
  • Single households with three children
  • Couple households with three children.

It’s worth noting that the HEM doesn’t take rent or mortgage payments into account, as it’s designed to measure household expenditure rather than housing costs.

How is the Household Expenditure Measure calculated and used?

The HEM forms part of lenders’ borrowing power calculations, which they use to determine how big a loan they can responsibly offer to you. By assessing your declared regular expenditure in conjunction with your HEM, a lender can generally make an informed estimate of your borrowing power.

The HEM also allows a lender to get a better idea of whether you’re spending more or less per year than other households of the same type. This, in turn, can influence how large a loan the lender can responsibly offer to you. However, it’s worth noting that lenders will typically assess your self-declared expenses against your household type’s HEM and then use the higher of the two values when calculating your borrowing power and home loan serviceability.

What isn’t included in the HEM figures?

Most notably, HEM doesn’t include your housing costs, such as rent or current mortgage repayments. While it covers the median spend on absolute basics, it doesn’t include things like:

  • Private school fees
  • Life insurance
  • Sickness and personal accident insurance
  • Superannuation
  • Alimony or maintenance payments
  • Interest repayments on loans
  • Lease payments
  • HECS.

The HEM also isn’t directly affected by interest rate or cash rate changes. However, that being said, a lift in inflation could potentially see the HEM increase due to the uptick in the cost of consumer goods as a result.

Is the HEM different to a living expenses calculator?

The primary difference between the HEM and a living expenses calculator is that the HEM calculation is designed to produce an average expenditure benchmark based on statistical data that lenders can judge household spending against. Conversely, a living expenses calculator helps you assess your own expenditure and budget and is specific to your financial situation.

However, just because the two are different doesn’t mean they can’t be used together. Most lenders may ask you to perform a self-assessment using a living expenses calculator or form that they provide. You’ll fill out your expenses, typically on a monthly basis, and submit it to the lender.

They can then use your self-assessment in conjunction with your proven income (i.e. payslips), bank statements and their HEM calculator tool to get the most accurate possible understanding of your expenses, and subsequently determine your borrowing capacity.


How does the HEM affect me?

couple auditing household expenses HEM

What if my expenses vary significantly from the HEM?

It’s entirely possible that your real expenses could be quite different to the HEM average for your type of household; after all, it’s just an average. However, lenders can’t and don’t rely on HEM exclusively when assessing your spending habits. They’ll typically also look at your bank statements and recent transaction history, compare them against the HEM for your type of household and will usually use whichever is higher when determining your expenditure and borrowing power.

What are some potential shortcomings of the HEM?

While the HEM is regularly used in the home loan applications and approvals process due to its utility as a benchmark for average expenditure, its nature as a ‘one-size-fits-all’ solution can cause issues. It’s previously come under fire from the Australian Securities and Investments Commission (ASIC), Australia’s financial services regulator, for being too broad-based and having the potential to be misrepresentative.²

For example, the way items are classified for the purposes of HEM calculations can paint a misleading picture of someone’s annual expenditure. Food, take-aways and restaurants are all classified as either absolute or discretionary basics; however, a home loan applicant could have feasibly spent thousands of dollars a year on luxurious groceries and meals, but all of that spending would be painted as part of their ‘necessary’ expenditure.

That being said, however, it’s generally not worth worrying about HEM’s potential shortcomings. Financial institutions and lenders are always working on improving and refining their respective approvals processes, and a lot of that is largely out of the hands of the individual.

What you do have control over is your own finances and expenditure, so your focus should be on making sure your spending and saving behaviours align with the level of prudence that home loan providers look for in a home loan applicant.

What other factors do banks look at when processing a home loan application?

Always remember that the HEM isn’t a factor specific to you; rather, it’s a database of indexed values used by lenders to determine your capacity to take on a home loan.

The other factors that typically also form part of the lender assessment may include:

  • The loan amount and LVR of the proposed home loan you’ve applied for
  • Your credit history
  • Your existing debts and assets, and any credit card or loan repayments you’re currently making
  • Your long-term spending and saving habits
  • Whether you’re a first home buyer
  • Whether your property will be owner-occupied or an investment property
  • Your income, current employment status and employment history.

So, at the end of the day, your own suitability for a home loan is largely influenced by your own personal circumstances, decisions and actions.

You can’t magically double your income, but living within your means, saving as much as possible, paying down any existing debt and avoiding new debt will all typically go a long way towards setting you up to be approved for a home loan.

Stephen Zeller, General Manager

Meet our home loans expert, Stephen Zeller

Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).

Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-relating content to ensure it’s as helpful and empowering as possible for our readers.


1 Melbourne Institute. Household Expenditure Measure (December Quarter 2022). 2023.

2 Federal Court of Australia. Australian Securities and Investments Commission v Westpac Banking. 2023.

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