What Is HEM and Why It Matters for Your Home Loan
If you have ever applied for a home loan in Australia, you may have heard your lender or broker mention HEM. It often comes up when discussing borrowing capacity, affordability, or why a loan amount is lower than expected.
HEM stands for Household Expenditure Measure, and it plays a critical role in how lenders assess your ability to repay a loan.
This article explains what HEM is, how lenders use it, and what it means for you as a borrower.
What Is HEM?
The Household Expenditure Measure is a benchmark used by Australian lenders to estimate the minimum cost of living for a household.
It is based on national data and reflects typical household spending across categories such as:
• Groceries and food
• Utilities like electricity, gas, and water
• Transport costs
• Insurance
• Clothing and personal items
• Basic recreation and lifestyle costs
Rather than relying only on what you say you spend each month, lenders compare your declared living expenses against HEM to make sure the figures are realistic and sustainable.
How Do Lenders Use HEM?
When you apply for a home loan, lenders look at two key things:
1. Your income
2. Your ongoing expenses
For expenses, lenders will usually take the higher of:
• Your declared living expenses, or
• The HEM benchmark for your household type
This approach is designed to prevent financial hardship and ensure responsible lending.
Factors that affect your HEM figure include:
• Whether you are single or a couple
• The number of dependants you have
• Your state or region
• Your income level
Higher income households generally have a higher HEM benchmark, reflecting increased lifestyle and spending expectations.
Why Your Declared Expenses Might Not Be Used
Even if you are confident you live very frugally, lenders may still default to HEM if your declared expenses appear too low.
For example:
• A couple with two children declaring very low monthly living costs
• A high income household claiming minimal discretionary spending
In these cases, the lender will usually apply HEM instead, as it is considered a more realistic minimum.
This is one of the most common reasons borrowers are surprised by their borrowing capacity.
HEM and Borrowing Capacity
HEM directly impacts how much you can borrow.
Higher assessed living expenses mean:
• Less surplus income
• Lower borrowing capacity
This is why two households with the same income can receive very different borrowing limits.
It is also why accurate, well documented expense information is important when applying for finance.
Can You Reduce the Impact of HEM?
You cannot negotiate HEM itself, but there are ways a broker can help present your application properly.
These include:
• Clearly explaining genuine low living costs with supporting evidence
• Structuring loans to reduce assessed repayments
• Selecting lenders with more flexible HEM models
• Timing applications to avoid unnecessary expense inflation
This is where lender selection and strategy matter.
HEM and Responsible Lending
HEM exists to support responsible lending obligations in Australia. Its purpose is not to restrict borrowers unnecessarily, but to ensure loans are affordable not just today, but long term.
From a borrower perspective, this protects you from:
• Overcommitting financially
• Stress if interest rates rise
• Limited cash flow after settlement
A good loan is one you can comfortably live with, not just qualify for.
The Bottom Line
HEM is a core part of every Australian home loan assessment.
Understanding how it works helps explain:
• Why borrowing capacity can vary
• Why lenders question living expenses
• Why broker advice can make a real difference
If you are planning to buy, refinance, or review your borrowing power, getting this right early can save time, frustration, and surprises later.
If you want to understand how HEM applies to your specific situation, a tailored assessment is always better than relying on online calculators alone.