The Household Expenditure Measure (HEM) is a benchmark used by lenders in Australia to estimate a borrower’s living expenses. It is a standard set of expenses based on household size and location, which provides an estimate of the minimum level of expenses needed to maintain a basic standard of living.
When assessing a borrower’s home loan application, lenders use the HEM to calculate the borrower’s ability to service the loan repayments, in addition to other financial factors such as income and assets. The HEM is intended to ensure that the borrower can comfortably meet their living expenses and repay the loan, without experiencing financial hardship.
HEM is used because some borrowers may underestimate their living expenses when applying for a loan, leading to them being approved for a loan they cannot afford. The HEM is a standard measure that can be used consistently across all loan applications, and it provides lenders with a more accurate estimate of a borrower’s living expenses, helping them make more informed lending decisions.
However, it’s important to note that the HEM is a benchmark and not a definitive measure of a borrower’s living expenses. Borrowers may have different living expenses, and the HEM may not accurately reflect their individual circumstances. Therefore, it’s crucial for borrowers to provide accurate information about their living expenses and financial situation when applying for a loan.
