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If you’re in the market for a home, you’re likely also in the market for a home loan. And anyone who’s bought a home before can attest to how complex the concept of ‘home loan eligibility’ can really be, from how many different factors might affect your eligibility for a home loan, to how much you might be able to borrow and so on.

One of the more universal benchmarks used by banks and lenders in Australia is the Household Expenditure Measure (HEM), which is used to help measure an applicant’s estimated regular expenses to assess their capacity to afford a home loan of a certain size.

Read on to learn more about HEM, how it’s calculated and how it might affect your home loan application.

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.

Other frequently asked questions about the HEM

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, bank statements and their HEM calculator tool to get the most accurate possible understanding of your expenses, and subsequently determine your borrowing capacity.

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 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.

What are some potential shortcomings of the HEM?

While the HEM is 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 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 future 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.

Stephen’s three HEM tips

  1. Usually, you’ll find a lender would like to review your living expenses in 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 may be an emergency visit to the dentist, some new turf for your home or something else you would not 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!
  2. 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 for most customers applying for a home loan. But just remember that this statement review is to make sure you can afford the proposed loan on top of your current living expenses so you’re not leaving yourself financially short after taking out the new loan.
  3. 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.

Ready to start your home loan journey?

If you’ve done the hard yards and think you’re ready to buy a home, you can use our home loan comparison tool to compare a wide range of home loan options, and make a more informed decision on which one might suit you.

So, if you’re ready to find out where you stand with lenders and start comparing home loans, take the plunge today!


  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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