Every Australian home loan application is assessed using the Household Expenditure Measure, the benchmark of typical household spending published by the Melbourne Institute and used by every APRA-regulated lender. We have written a full explainer on HEM separately. This piece is about something the HEM explainer does not say loudly enough: which tier of HEM your specific application uses is entirely the lender's choice, you do not get to see it, and the choice can shift your borrowing capacity by tens of thousands of dollars.
The Melbourne Institute publishes HEM benchmarks at three lifestyle tiers: basic, modest, and lavish. Basic captures essential spending only. Modest captures essential plus moderate discretionary. Lavish captures essential plus full discretionary including dining, entertainment and travel.
The same income level produces materially different HEM figures across the three tiers. On a couple with $180,000 combined gross income and one dependant child, the difference between basic and modest is around $12,000 per year. The difference between basic and lavish is around $24,000 per year. Plugged into the buffered serviceability assessment, the gap is the difference between borrowing $800,000 and borrowing $720,000.
Which tier is used (and how the lender decides)
Different lenders default to different tiers. Some lenders default to "modest" across all applications. Some lenders apply "lavish" to applications above defined income thresholds (typically $200,000+ combined). Some lenders apply tier escalation based on declared expenses, postcode, school fees, or specific lifestyle markers found in bank statements.
The choice is internal credit policy. It is not regulated. It is not disclosed to the applicant. The serviceability calculation is done in the credit assessment system, the borrowing capacity number comes out, and if the borrower asks "why is my capacity lower than I expected", the credit officer will typically say something like "the model factors in living costs" without specifying the tier or the actual HEM figure used.
For most borrowers, this is invisible. The application either approves at the requested amount or comes back with a counter-offer at a lower amount. The borrower assumes the model is right, accepts the lower amount, and never knows that a different lender on the same file would have approved at the requested amount because their HEM overlay was less aggressive.
Why high-income borrowers get hit hardest
The lender overlay matters most at higher income levels because the HEM tier escalation typically kicks in above defined thresholds. A couple on $250,000 combined income at a lender that uses "lavish" tier for high-income applications might see HEM living costs of $80,000+ per year assessed against them, even if their actual spending is $50,000.
The justification the lender will give if pressed: "high-income households typically have higher spending patterns and we model accordingly". The reality: the lender is choosing a higher HEM tier because the higher number protects them against future income shocks (forgone bonuses, lost contracts) at the cost of the borrower's borrowing capacity.
For high-income borrowers who are actually savers (people who earn $300,000 and spend $80,000 because they are paying down debt, building investment portfolios, or supporting family), the lavish-tier HEM assumption is straight-up wrong. The lender knows it might be wrong. The lender prefers the conservative wrong answer because the downside is shared (borrower has lower capacity) and the upside is captured (lender has a more defensible credit decision in the event of future stress).
The broker workaround (and why it matters)
A broker on a wide panel can quote the same file across 5 to 10 lenders and identify which lender's HEM overlay produces the highest borrowing capacity. The gap between the most aggressive and least aggressive HEM tier across the panel is frequently 10 to 15 per cent of the loan size.
This is not a secret hack. This is the basic value-add of broker shopping that the major banks would prefer the borrower not know about, because if the borrower knew, the borrower would walk into the branch fewer times and walk into the broker channel more often. The 76 per cent broker share of new mortgage originations in Australia in 2026 reflects this gradual shift in borrower awareness.
The right test for any borrower receiving a lower-than-expected borrowing capacity quote from their bank is: get the same file run through a broker on a different lender panel. If the second quote comes back materially higher, the difference is overlay (HEM tier and/or credit policy) and you can act on it.
What the HEM tier rort does not change
Credit card limits, existing debt, dependants, declared income, and lender-specific floor rates all do more damage to most borrowers' capacity than the HEM tier choice. The HEM tier matters most at the margin (high-income borrowers, marginal qualifying borrowers, borrowers with non-standard spending patterns). For typical PAYG borrowers with average household composition and clean credit, the HEM tier difference between lenders is typically 5 to 8 per cent of capacity rather than 15 to 20.
But 5 to 8 per cent of capacity on a $700,000 loan is $35,000 to $56,000. That is a kitchen renovation, a stamp duty contribution, or the gap between affording the property you want and accepting a compromise. The tier difference is not academic.
What you can actually do
You cannot directly negotiate which HEM tier the lender uses. You can do these four things:
- Get a borrowing capacity quote from your existing bank. Then get the same file quoted by a broker who has 5 to 10 lenders on the panel. Compare. If the broker quote is materially higher, the gap is overlay and you can use the higher number.
- Clean up the discretionary spending in your bank statements before applying. HEM tier escalation at some lenders is driven by visible discretionary spending patterns in the 3 months of bank statements they review. A clean spending pattern reduces the chance of tier escalation.
- Close unused credit cards and reduce active credit limits. This is the highest-impact lever for borrowing capacity at every lender and is independent of HEM tier. We have written separately on this.
- Ask the lender or broker which HEM figure was used in your assessment. They are not required to tell you, but a credible broker should be able to walk you through the calculation. If they cannot or will not, that is itself a signal about who you should be working with.
Disclosure
Your Finance Guide partners with Australian Lending and Investment Centre (ALG) ACL 505575 for broker matching. ALG receives commissions from lenders. We get paid for matches that proceed. The editorial position in this piece is that the consumer should be able to shop the lender panel to find the most appropriate credit policy for their file, and that the lack of disclosure on internal HEM tier choice is a structural disadvantage for borrowers who do not use a broker. This is a position we hold regardless of the commercial outcome of any specific match.