How Banks Really Calculate Your Living Expenses — And Why Cutting Your Spending Before Applying Probably Won't Help

When you apply for a home loan, your lender doesn't just look at how much you earn. They look at how much you spend. And in most cases, they don't use the figure you write on the application form — they use a standardised benchmark called the Household Expenditure Measure (HEM). Understanding how HEM works, where it comes from, and how it interacts with your borrowing capacity is one of the more practical things a borrower can learn before approaching a lender.

What Is the Household Expenditure Measure?

The HEM is a quarterly benchmark published by the Melbourne Institute of Applied Economic and Social Research. It was developed in 2011 as a standardised measure of modest but adequate household spending — not average spending, and not minimum survival costs, but something in between.

The underlying data comes from the Australian Bureau of Statistics Household Expenditure Survey, which surveys thousands of households every six years and tracks spending across more than 600 categories. The Melbourne Institute updates the HEM quarterly in line with CPI movements.

HEM covers three categories of spending:

The critical detail is in how those categories are measured. HEM uses the median spend for absolute basics, but only the 25th percentile — the bottom quarter of households — for discretionary spending. In other words, HEM assumes you spend at the midpoint for necessities but well below average on anything discretionary. This is intentionally conservative.

The HEM figure varies by household type (single, couple, with or without children) and by income band. Higher-income households get a higher HEM applied, on the basis that they tend to spend more even on basics. It's also adjusted quarterly for inflation — the benchmark you're assessed against in March 2026 is higher in dollar terms than it was in 2022.

The actual HEM tables are proprietary — licensed commercially to lenders and not publicly published. But as a rough guide, indicative monthly figures for mid-income households look something like this:

How Lenders Actually Use HEM

When you fill out a home loan application, you'll be asked to estimate your monthly living expenses across categories — groceries, transport, utilities, entertainment, and so on. Lenders then compare your declared expenses against the HEM benchmark for your household type and income.

The rule is simple: they use whichever figure is higher.

In practice, many borrowers declare expenses below HEM — either because they genuinely underestimate their spending, or because they're presenting their finances in the best light. In either case, the bank applies HEM as a floor and your declared figure becomes irrelevant.

The formula lenders run through is broadly:

Crucially, living expenses (the HEM component) and committed expenses (credit cards, loans) are assessed separately and stacked on top of each other. Why this matters is covered in the next section.

The Wagyu Beef and Shiraz Case — and Why HEM Is Still Legal

HEM became nationally prominent during the 2019 Royal Commission and subsequent court proceedings. ASIC sued Westpac, alleging the bank's reliance on HEM without verifying actual expenses breached responsible lending obligations. The case produced one of the most memorable lines in Australian banking law.

In the Federal Court hearing, Justice Perram observed:

The point: a borrower's current lifestyle spending doesn't necessarily reflect what they could live on while repaying a mortgage. ASIC lost the case. The Full Federal Court upheld the finding 2:1, ruling that using HEM was a legitimate assessment methodology and that the National Credit Act does not require lenders to verify actual expenses in detail — only to make "reasonable" inquiries.

This means banks are legally entitled to use HEM. It also means that a high-spending borrower assessed at HEM may actually be approved for more than their genuine spending patterns might suggest is prudent.

That said, the Royal Commission created significant pressure for lenders to improve their practices even where not legally compelled to. Today, most major lenders request three to six months of bank statements and cross-reference declared expenses against actual transaction data. Open Banking has also enabled some lenders to access transaction history directly. The legal minimum is HEM; the practical reality for most applications is HEM plus statement verification.

What Actually Changes Your Borrowing Capacity

This is where most borrowers get things wrong. They spend months cutting back on takeaway food and subscriptions to present "lower" living expenses — and it makes almost no difference to their borrowing capacity.

Here's why: even if you genuinely spend less, the bank still applies HEM as a floor. There is no reward in the serviceability calculation for spending less than HEM. Your Uber Eats history does not feature in the formula.

What does move the needle significantly is your committed expenses — the contractual liabilities that sit above HEM in the serviceability calculation.

What Helps: Reducing Committed Expenses

What Doesn't Help

Where HEM Can Work in Your Favour

There's a scenario where HEM actually benefits borrowers: high earners with genuinely high discretionary spending.

If you're earning $180,000 and regularly spending $5,000 a month on dining out, holidays, and lifestyle — but you want to prioritise buying a home — the bank doesn't use your $5,000 figure. They use HEM, which for your income band and household type might be $3,000–$3,500. The bank assumes you'll moderate discretionary spending once you have a mortgage, consistent with the wagyu principle.

This can mean high-income, high-spending borrowers qualify for more than their actual spending habits might suggest they could comfortably service. It's one reason the responsible lending debate has remained active — HEM doesn't prevent loans to households already stretched on actual spending.

The inverse is also true: HEM can work against genuinely frugal high-income borrowers whose actual spending sits well below their income band's benchmark. A single borrower earning $200,000 who actually spends $1,400/month may find their HEM applied at $2,500+ due to their income band, reducing borrowing capacity below what their real spending patterns would justify.

The Double Squeeze in 2026

In a lower-rate environment, HEM was a minor factor — the serviceability buffer was doing most of the work. In 2026, with the RBA having raised the cash rate twice to 4.10%, HEM and the buffer are both compressing borrowing capacity simultaneously.

Standard variable rates are now in the 6.5–7.0% range. With the 3% APRA buffer, new borrowers are assessed at 9.5–10.0%. That assessment rate is substantially higher than anything seen between 2020 and 2024 — and it operates alongside HEM in the same serviceability formula.

The numbers shift quickly — and this is the environment Sydney buyers are navigating right now.

What This Means for How You Prepare

The most useful thing borrowers can do in the lead-up to an application is clean up their committed expense profile — not their lifestyle spending.

Getting across lender differences in HEM calibration is also where a broker adds concrete value — not just in finding the best rate, but in identifying which lender's assessment model suits your specific income and household profile.

Written by Amit Narang, Mortgage Broker | Credit Representative 558902 of Outsource Financial Pty Ltd (ACL 384324)

Sources: Melbourne Institute of Applied Economic and Social Research (Household Expenditure Measure); ASIC v Westpac Banking Corporation [2020] FCAFC 111 (Full Federal Court); Hayne Royal Commission Final Report (February 2019); APRA Prudential Practice Guide APG 223 (December 2022); ASIC 2019 review of lending standards following the Royal Commission.