One of the things you’ll be asked about when you speak to one of our mortgage brokers are your regular expenses. Later on you might even be asked to share some of your recent bank statements. Despite all this, banks might instead look at something called HEM.
If this is your first time buying a home it might seem a bit confusing. You might be asking what HEM is and why it’s needed.
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HEM is used by Australian lenders to help assess an applicant’s risk level
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HEM is calculated based on national data but each lender has its own formula
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HEM is often used alongside your actual expenses to make a decision
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Why do I need to share my expenses for a home loan application?
It comes as a shock to some clients when we ask how much money they spend, but there’s a good reason for it.
Most lenders want a complete picture of your finances – both your incomings and outgoings – so they can be confident in your ability to pay back a loan. If you’re making $1000 a week but spending $950, it doesn’t leave much wiggle room for an extra expense like a mortgage.
Some people know this so they try to fudge their numbers a bit. Tell us things on the low side – maybe even cut back on takeaway for a few months in case we ask for bank statements (which many lenders do) – but even then the truth will come out because if someone’s expenses seem a bit too low to be true, most banks will instead look at HEM (Household Expenditure Measure).
What is HEM and how is it calculated?
HEM is essentially the median expenses expected of a person in Australia. It’s based on ABS data and looks at hundreds of different items to paint a picture of the typical Aussie.
The three key areas it looks at are basics (like groceries and utilities), extras (like takeaway and nights out) and luxuries (like big holidays). It doesn’t include rent or mortgage payments.
Despite this, there’s no one formula for HEM. Each lender has their own way to assess things and this can change depending on your own status: where you live, your age, your family situation and more.
Although you can’t specifically see your own HEM details, you can use a borrowing power calculator to get an idea of how much you could get when you apply for a home loan.
How is HEM used?
HEM is used by lenders to assess if an applicant can truly afford a home loan.
Because it’s an average, it can be seen as a disadvantage to people who are more thrifty. This is often a precaution against people who have made short term sacrifices to boost their finances. The fear is that they’ll revert to regular spending habits after they’ve been approved and then they may find themselves with mortgage stress as the bills rack up.
To avoid issues like this (and wider problems like the American housing crash that preceded the 2008 global financial crisis), banks in Australia are required by law to lend responsibly.
Understanding mortgage applications
When you’re a first-time home buyer, there’s a lot of things to get your head around. If you want some help simplifying the process, our brokers offer a no-cost, no-obligation service. Give our Newcastle office a call on 02 4961 4985 and one of our team will happily answer any home loan questions you have.
