What is the Household Expenditure Monthly?

The HEM was developed by the Melbourne Institute of Applied Economics in 2011 as a measure to reflect a modest level of weekly household expenditure for various types of families.

The methodology of HEM

The ABS (Australian Bureau of Statistics) regularly collects final consumption of goods and services data from Australian households. Participating banks send transaction data to the ABS soon after the end of each calendar month. Supermarkets send weekly transaction data. For full details, refer to the ABS website.

Why Do banks Use The HEM?

Under the National Consumer Credit Protection Act 2009, Australian banks must make allowance for living costs when they assess the borrowing power or serviceability assessments for applicants. Many lenders require home loan applicants to provide an estimate of their weekly or monthly spend on essentials like groceries, transport and utilities.

Lenders must comply with the rules on Responsible Lending. They must not loan money to applicants who are not in a financial position to pay back the loan. Lenders must also make “reasonable inquiries” about their financial position to assess whether they are a suitable candidate for a loan.

HEM uses a median expenditure of “Basic Expenses” combined with 25% of spending on “Discretionary Spending”. The lender will then compare the figure provided against the lender’s HEM calculation for someone with a similar lifestyle. The HEM considers essential (non- discretionary) spending and factors in a small amount for non-essential (discretionary) spending.

A lender normally uses the higher of these two figures (declared expenses or the HEM) to decide how much an applicant can afford in regular monthly loan repayments or if a mortgage meets their budget at all.

If the expenses are notably lower than the lender’s HEM, the lender may seek clarification of the expenses by provision of up to three months of day-to-day transactions.

Other factors include borrower’s location, income, lifestyle standard, relationship status, number of dependants, to factor in reasonable expenses.

Why is the HEM Controversial?

The main controversy is that it can vastly underestimate non-essential living expenses.

Since the Banking Royal Commission in 2018, lending requirements have tightened, and banks want to know where applicants are spending their money. For most part, lenders just want to see that applicants can afford to meet their obligations if they obtained a mortgage loan.

Living expenses are also a good indication of character for a potential borrower.

Some RED FLAGS to Consider

Applicants need to show that they are able to afford a home loan and their spending does not raise any red flags :-

• Regular spending at pubs, clubs, occasions, online betting and gambling
• Spending on luxury fashion items.
• Undeclared debts

For further details, contact Paul today on 0417 567 747

 

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