Understanding the Household Expenditure Measure (HEM) in Australia and Its Impact on Home Loans
Introduction
When applying for a home loan in Australia, lenders use various methods to assess your ability to repay the loan. One crucial metric they consider is the Household Expenditure Measure (HEM). Understanding what HEM is and how it impacts your home loan application can help you better prepare and increase your chances of approval.
What is the Household Expenditure Measure (HEM)?
The Household Expenditure Measure (HEM) is a benchmark used by Australian lenders to estimate a borrower’s living expenses. Developed by the Melbourne Institute, HEM provides a standardized measure of household expenses based on income levels, family size, and living standards. It serves as a guideline for lenders to assess whether borrowers can afford to repay their loans after accounting for their everyday living costs.
Learn more about HEM from the Melbourne Institute.
How Does HEM Work?
HEM categorizes households into different groups based on their income and lifestyle, including:
- Single Person
- Couple without children
- Couple with children (one, two, or more)
- Single parent (with one, two, or more children)
For each category, HEM provides a set of living expense estimates, which include costs for essentials such as food, clothing, utilities, transportation, and other personal and household expenses.
Why Do Lenders Use HEM?
Lenders use HEM to ensure that borrowers have sufficient income to cover both their living expenses and mortgage repayments. This measure helps lenders mitigate the risk of loan defaults by providing a more accurate picture of a borrower’s financial situation. By using HEM, lenders can:
- Standardize Expense Assessments: Provide a consistent method for evaluating living expenses across different borrowers.
- Simplify the Approval Process: Streamline the loan approval process by using a pre-determined benchmark for expenses.
- Enhance Borrower Protection: Prevent borrowers from overextending themselves financially.
How HEM Affects Your Home Loan Application
Understanding how HEM impacts your home loan application can help you prepare better and avoid potential pitfalls. Here are some key points to consider:
1. Living Expenses Assessment
When you apply for a home loan, you will be required to provide details of your monthly living expenses. Lenders compare your declared expenses with the HEM benchmark. If your expenses are significantly lower than the HEM figure, the lender may use the higher HEM estimate to ensure they are not underestimating your cost of living.
2. Loan Affordability
HEM plays a crucial role in determining your loan affordability. Lenders use your income, living expenses (based on HEM), and other financial commitments to calculate your borrowing capacity. If your expenses are high, it may reduce the amount you can borrow.
Check out ASIC’s guide on home loans for more information.
3. Budgeting and Financial Planning
By understanding HEM, you can better manage your finances and plan your budget. Knowing the benchmark for living expenses can help you adjust your spending habits and save more for your home loan deposit and repayments.
4. Impact on Loan Approval
A higher HEM can sometimes result in a lower loan amount being approved, as lenders want to ensure that you can comfortably afford your repayments. If your actual living expenses are higher than the HEM, it could affect your borrowing power and the loan approval process.
Tips to Improve Your Home Loan Application
To improve your chances of home loan approval, consider the following tips:
- Accurate Expense Reporting: Be honest and accurate when reporting your living expenses. Lenders will scrutinize your financial history and statements.
- Reduce Unnecessary Spending: Minimize discretionary expenses and save more to boost your financial profile.
- Increase Your Income: If possible, find ways to increase your household income through additional work or passive income streams.
- Pay Down Debts: Reduce your existing debts to improve your debt-to-income ratio and increase your borrowing capacity.
Conclusion
The Household Expenditure Measure (HEM) is a vital tool used by lenders to assess your living expenses and loan affordability. By understanding how HEM works and its impact on your home loan application, you can better prepare and enhance your chances of securing a mortgage.
Whether you’re a first-time home buyer or looking to refinance, knowing your living expenses and how they compare to the HEM benchmark can provide valuable insights into your financial situation. It’s important to be proactive in managing your expenses, reporting them accurately, and understanding how they influence your borrowing capacity.
If you’re looking for personalized advice and expert assistance with your home loan application, contact us at FundingAdvisor today. Our experienced mortgage brokers are here to guide you through the process and help you achieve your home ownership goals.
Ready to apply for a home loan or need more information about HEM? Contact our experienced mortgage brokers at FundingAdvisor to guide you through the process and help you achieve your home ownership goals. Visit our website or call us at 0409446154 to get started.
Learn more about the housing market and home loans from the Reserve Bank of Australia (RBA).
