When you apply for a home loan in Australia, the lender does not just look at your income and rate. They model a complete household budget. The benchmark they use for the spending side of that budget is the Household Expenditure Measure (HEM), published by the Melbourne Institute and treated as the standard living-cost floor across every APRA-regulated bank and credit union in the country.
HEM is the single biggest controllable variable in your borrowing capacity calculation, more material than the actual headline rate in most cases. A typical owner-occupier P&I applicant with $150,000 combined household income can see HEM lifting their assumed living costs by $20,000 to $40,000 a year above their actual spending, which cuts borrowing capacity by $100,000 to $300,000 depending on family composition.
This guide walks through what HEM is, how it is calculated, why it can be so material, and the four practical moves Australian borrowers can make to work with HEM rather than against it.
What HEM actually is
HEM is a benchmark of typical Australian household spending, published by the Melbourne Institute. The benchmark is built from Australian Bureau of Statistics Household Expenditure Survey data, with statistical modelling applied to convert that raw survey data into a usable benchmark across different household profiles.
The benchmark is structured around three lifestyle tiers (basic, modest, lavish) and is sensitive to four primary household variables: gross income, household composition (number of adults and dependants), location (capital city versus regional), and household type (single, couple, family). Each combination produces a different annual living cost figure, which is the number the lender plugs into the serviceability calculation.
Lenders use the higher of your declared living expenses or HEM for your household profile. This is the critical rule. If you declare $35,000 a year in living expenses but HEM for your profile is $52,000, the lender uses $52,000. If you declare $65,000 and HEM is $52,000, the lender uses $65,000. The mechanic is one-way: HEM sets a floor, not a ceiling.
How HEM scales with household composition
HEM increases sharply with household size. The progression for the modest tier (the most commonly used by lenders) at a $150,000 gross household income looks broadly like this in 2026:
- Single adult, no dependants: ~$30,500 per year
- Couple, no dependants: ~$46,000 per year
- Couple, one dependant child: ~$56,000 per year
- Couple, two dependant children: ~$65,000 per year
- Couple, three dependant children: ~$72,500 per year
Each additional dependant lifts the HEM benchmark by $7,000 to $10,000 a year, which under the APRA serviceability buffer translates to a borrowing capacity reduction of $70,000 to $130,000 per child. This is one of the largest hidden costs of family size in the mortgage application process.
How HEM scales with income
HEM also scales with income, but on a less-than-linear basis. A household on $250,000 combined gross income has a HEM benchmark only modestly higher than a household on $150,000 because the underlying ABS data shows higher-income households save a larger proportion of their income rather than spending all of it.
This non-linear scaling has a practical implication: at higher incomes, the gap between actual spending and HEM tends to narrow. A high-income household that has built genuine spending discipline may find HEM is now close to or below their actual figure, which means the lender will use the higher declared expenses anyway. The HEM lever weakens as income rises.
Where the lenders apply their own overlays
All APRA-regulated lenders reference the Melbourne Institute HEM benchmarks, but individual banks apply their own credit policy overlays. Some lenders:
- Use the higher modest tier as default rather than basic, which lifts the HEM figure used by 5 to 15 per cent.
- Apply additional living cost loadings for specific property types (high-end inner-city apartments, investment property with body corporate fees) where lifestyle costs are assumed to be higher.
- Reduce or carve out HEM for specific income types (e.g. some lenders apply lower HEM for high-net-worth borrowers above defined income thresholds).
- Add a HEM uplift for declared dependants beyond a certain count, on the basis that the standard HEM progression understates large-family spending.
The variation lender-to-lender is one of the reasons borrowing capacity quotes can differ by $30,000 to $80,000 between lenders for the same household. A broker on a wide panel quotes the file across multiple lenders and identifies which credit policy produces the highest borrowing capacity for the specific borrower profile.
Four practical moves to work with HEM
HEM is not a number you can negotiate down through the application process. It is set by the Melbourne Institute. But four practical moves can change the effective HEM impact on your borrowing capacity.
Move one: clean up the credit profile before applying
Credit cards and BNPL accounts are treated as potential debts based on limits, not balances. A $20,000 credit card limit you never use is still assessed as a $600 a month repayment commitment, which compounds with the HEM floor to reduce borrowing capacity by $90,000 to $120,000. Closing unused cards or reducing limits before the application is the single highest-impact move available before lodgement.
Move two: shop the lender panel
As above, HEM overlays vary by lender. A broker comparing your file across 5 to 10 lenders will identify which credit policy is most favourable to your specific household composition. The gap between the highest and lowest borrowing capacity quote on the same file frequently exceeds 10 per cent of the loan size. Shopping the panel is not optional value-add; it is the single most reliable way to find the policy that fits.
Move three: time the application around dependant transitions
HEM adds $70,000 to $130,000 of assessed living costs per dependant. For households planning to start a family or with a new arrival imminent, the timing of the loan application matters materially. An application lodged before the birth of a child uses the pre-birth HEM (no dependant); an application after the birth uses the post-birth HEM (one dependant). The difference in borrowing capacity can be material. This is not advice to time around children for loan-application reasons, but it is a calculation worth understanding.
Move four: consolidate revolving debt into structured debt
Existing personal loans and credit-card debt are assessed using rules that often produce a harsher capacity hit than the actual repayment commitment. Consolidating revolving debt into a structured personal loan with a clear amortisation schedule can reduce the assessed repayment commitment in some lender models. The maths varies by lender; a broker can model the before-and-after for the specific lender panel.
What about declared expenses versus HEM
A common misconception is that you can manipulate the HEM impact by declaring lower expenses on the application. This does not work. The lender uses the higher of declared or HEM, so declaring below HEM does not change the calculation. Declaring above HEM, accurately, will produce a higher figure that hurts capacity.
The right approach to declared expenses is straightforward: declare honestly. If your spending is below HEM (a saver profile), HEM is the figure used regardless and your honest declaration does no damage. If your spending is genuinely above HEM, declare accurately because the lender will discover the gap during income and bank statement verification, and a mis-declaration is a serious credit application offence under the National Consumer Credit Protection Act.
What HEM does NOT include
HEM is the benchmark for typical living costs excluding housing payments. The following are separately accounted for in the lender\'s serviceability assessment and not included in HEM:
- Rent (dropped from assessment for owner-occupier loans because the new loan replaces it)
- Mortgage repayments on the new loan being applied for (assessed at the buffered rate)
- Mortgage repayments on existing properties (added as separate commitments)
- Council rates and home insurance (added as separate commitments)
- Existing personal loans, car loans, credit card limits (added as separate commitments)
This means a borrower with a $20,000 credit card limit, $35,000 in HEM living expenses, $4,500 in council rates and home insurance, and a $400 a month car loan is assessed at $35,000 + $5,400 + $4,800 + $7,200 = $52,400 of fixed commitments before mortgage repayments. The HEM piece is the largest single component but not the only one.
The 2026 regulatory context
APRA opened consultation on the 3 per cent serviceability buffer in May 2026, which is the regulatory test that sits on top of HEM. Industry submissions have argued for a lower or dynamic buffer; the final decision is expected late Q3 2026. HEM itself is not under regulator review; the Melbourne Institute benchmark continues to be updated on its quarterly cycle.
For borrowers planning a loan application in 2026, the practical position is: HEM continues to apply as it has, and the standard 3 per cent buffer on top continues to apply as the regulator settles on the final framework. If the buffer ultimately falls, the practical effect for marginal borrowers is to lift maximum borrowing capacity by 8 to 13 per cent depending on income profile.
Frequently asked questions
What is the Household Expenditure Measure (HEM)?
HEM is the benchmark of typical Australian household spending used by every authorised deposit-taking institution (bank or credit union) when assessing your borrowing capacity for a home loan. It is published by the Melbourne Institute and is updated periodically to reflect actual ABS household expenditure data. Lenders use the higher of your declared living expenses or the HEM benchmark for your household profile when calculating how much you can afford to repay.
How is HEM calculated for my household?
HEM is calculated as a function of your gross income, household composition (number of adults and dependants), location, and lifestyle tier (basic, modest, lavish). For a single-adult household, HEM scales upward through a series of income bands. For couples and families, an additional adult dependant adds a fixed proportion; each additional dependant child adds a further proportion. The exact figure for your profile is generated by the lender's internal HEM lookup table at application time.
How much does HEM affect my borrowing capacity?
HEM is the single biggest controllable variable in your borrowing capacity calculation, often more material than the actual headline rate. A typical owner-occupier P&I loan applicant on $150,000 combined household income sees HEM living expense estimates running between $46,000 and $70,000 a year depending on household composition. The buffered serviceability assessment treats this as a fixed monthly commitment, which can reduce maximum borrowing capacity by $100,000 to $300,000.
Can I override HEM by declaring lower expenses?
No, not in the way most borrowers expect. The lender uses the higher of your declared living expenses or the HEM benchmark. If you declare expenses below HEM for your household profile, the lender will use HEM. If you declare expenses above HEM, the lender will use your declared figure. Understating expenses to manipulate the test is a serious credit application offence under the National Consumer Credit Protection Act.
How often is HEM updated?
The Melbourne Institute updates the HEM benchmarks approximately quarterly, with the larger annual recalibration aligned to ABS Household Expenditure Survey releases. The benchmarks tend to rise modestly with inflation over time. Lenders update their internal HEM tables shortly after each Melbourne Institute release, so the figure used in your application reflects the most recent published benchmark.
Does HEM include rent or my existing mortgage repayments?
No. HEM is the benchmark for typical living costs excluding housing payments. Rent, mortgage repayments, council rates and home insurance are treated as separate commitments in the serviceability assessment. For a borrower currently paying rent, the rent is dropped from the assessment if the loan is for an owner-occupied property (because the new loan will replace the rent payment).
Do all lenders use the same HEM table?
All APRA-regulated banks and credit unions reference the Melbourne Institute HEM benchmarks, but individual lenders apply their own overlays on top. Some lenders apply a more conservative version (e.g. use the higher tier on certain household profiles); others have specific carve-outs for certain income or property types. The variation lender-to-lender is one reason borrowing capacity quotes can differ by $30,000 to $80,000 between lenders for the same household.
How does HEM interact with the APRA serviceability buffer?
HEM sets the living-cost floor in the affordability calculation. The APRA 3 per cent serviceability buffer is then applied on top of the actual interest rate to test the borrower's ability to repay at a stressed rate. The two work together: HEM tightens the assumed surplus income, then the buffer tests that surplus against a higher-rate scenario. Both are currently under regulator review, but as at mid-2026 the standard 3 per cent buffer still applies and HEM continues to be used universally.