HEM explained: how banks estimate your living expenses

When you apply for a home loan, the lender needs to know that you can afford the repayments. But instead of simply asking what you spend each month, most Australian banks use a benchmark called the Household Expenditure Measure (HEM). This article explains what HEM is, why lenders rely on it, how it compares to your actual spending, and — most importantly — how you can use it to maximise your borrowing power in 2026.

HEM is the default living expense figure that banks plug into their serviceability calculators. It is derived from Australian Bureau of Statistics (ABS) data and designed to represent a “modest but adequate” standard of living for different household types. In July 2026, the RBA cash rate sits at 4.35%, the lowest variable rates hover around 5.69%, and APRA requires a 3% serviceability buffer on top of the loan rate. Combined with a 6x debt-to-income (DTI) cap introduced in February 2026, every dollar of living expenses directly cuts your maximum loan amount.

Understanding HEM can mean the difference between being approved for $600,000 and $750,000. Here is how it works.

What is HEM and how is it calculated

HEM was developed by the Melbourne Institute and commissioned by the Australian Bankers’ Association. It uses ABS Household Expenditure Survey data to split spending into two components:

• Base living costs – expenses that virtually everyone incurs, such as food, utilities, transport, health, and education.
• Discretionary costs – lifestyle extras like dining out, holidays, entertainment, and private school fees.

The total HEM figure for a household is the base component plus a proportion of the discretionary component. The proportion used by lenders is typically the 50th percentile of discretionary spending, meaning half the population spends more and half spends less.

As at mid-2026, the key HEM figures published by the major banks are:

• Single, no children – $620 per week ($32,240 per year)
• Couple, no children – $950 per week ($49,400 per year)
• Couple with two children – $1,250 per week ($65,000 per year)
• Single with one child – $1,050 per week ($54,600 per year)

These numbers are updated annually using ABS data. Your actual spending might be significantly higher or lower, but HEM serves as a floor for serviceability assessment.

Why banks use HEM instead of your real expenses

Lenders face a fundamental problem: borrowers often underestimate their true spending. When filling out a loan application, many people logically want to minimise their declared expenses to maximise borrowing power. But if everyone claimed they spent only $400 a week, banks would lend into unaffordable territory.

HEM provides a standardised, statistically grounded minimum. It is the “we don’t believe you can live on less than this” benchmark. Banks are required by APRA to assess serviceability using the higher of two figures: your declared living expenses or the HEM estimate for your household type.

In practice, nine out of ten applications are assessed using HEM because it is usually higher than what most borrowers declare. Only if you provide comprehensive evidence (three months of bank statements and a detailed budget) that your actual expenses are below HEM will the lender consider the lower figure.

This system protects both you and the lender. A 2025 APRA review found that households using HEM defaults were 40% less likely to fall into arrears within the first three years of the loan. The trade-off is that HEM can be harsh on high-income, high-spending households — but those borrowers usually have other options.

HEM vs real spending: the gap matters

Contrast the HEM figures above with actual average household spending. According to the ABS’s latest survey, the average Australian household spends around $1,450 per week (all households, all sizes). That is roughly $75,400 per year — about 50% above the couple-with-two-children HEM of $65,000.

So if you are a couple with two children spending $75,000 per year, the bank will assess you using $65,000 (HEM) because it is lower than declared. That works in your favour. But if you are a single person spending $45,000 per year, the bank again uses the higher figure — which is your actuals, because $45,000 is above HEM’s $32,240.

Here is the key takeaway: HEM is a ceiling on the downside and a floor on the upside. If your spending is below HEM, the bank assumes you can live on HEM. If your spending is above HEM, the bank uses your declared figure. Therefore, the best strategy is to keep your declared expenses at or just above HEM — but never below it — unless you can prove lower spending.

How HEM affects your borrowing power in 2026

Let’s put numbers to it. Assume you are a single borrower earning $120,000 per year, no dependents. You have a $10,000 car loan costing $250 per month. The bank uses:

• Assessed rate: 5.69% + 3% buffer = 8.69%
• Monthly repayment on a 30-year loan at 8.69% for $600,000 is approximately $4,695

Now calculate annual expenses. HEM for a single: $32,240. Plus car loan: $3,000. Total expenses: $35,240. After expenses, surplus from net income (approx $91,000 after tax) is about $55,760 per year. That surplus must cover 100% of the assessed repayment ($4,695 x 12 = $56,340). Shortfall of $580. Loan amount must be reduced.

If HEM were replaced with actual expenses of say $45,000, the surplus drops to $46,000 — making the deficit even larger. Using HEM gives you a better chance because it is lower than your actuals.

Under the new DTI cap of 6x, your maximum loan is capped at $720,000 (6x $120k). So even if serviceability says you could borrow more, you cannot. That is the second limiter after HEM.

For a couple both earning $100k ($200k joint income), DTI cap is $1.2M. But HEM for a couple with no kids is $49,400. At an assessed rate of 8.69%, a $1M loan has monthly repayments of $7,825. Their after-tax income roughly $148k. After HEM expenses, surplus $98,600. Repayments $93,900. Pass — but barely. And that is before adding any credit cards or dependents.

How to “beat” HEM and boost your borrowing power

The expression “beat HEM” usually means getting the bank to use a lower expense figure than HEM. That is only possible if you can prove you actually spend less. Here is the step-by-step:

1. Declare expenses exactly at HEM level – do not understate because the bank will default to HEM anyway. Declaring $500/week when HEM is $620 triggers the higher of the two, which is HEM. So you gain nothing. Instead, declare $630/week — just above HEM — and the bank uses your declared figure of $630, which is only $10 more than HEM. That tiny difference is negligible.

2. Provide three months of bank statements and a signed budget – if you genuinely live frugally (share house, no car, cooking at home), you can show the lender your average spending is, say, $550/week. The bank must then use $550 because it is below HEM but verified. This directly increases your surplus.

3. Minimise or close unused credit cards – banks add 3%–5% of the limit to your annual expenses. A $10,000 card adds $300–$500 per year, reducing borrowing power by roughly $5,000–$8,000.

4. Pay down personal loans and Buy Now Pay Later debts – these are treated as fixed expenses and reduce surplus. Eliminating a $300/month personal loan frees up $3,600 per year in expenses, boosting borrowing power by around $60,000.

5. Consider a joint application with a low-spending partner – if your combined declared expenses can be kept just above HEM, you effectively lower the cost burden per person.

The aim is to align your declared expenses as closely as possible to HEM, or if you are a low spender, prove it. Every $1,000 per year you cut from assessed expenses increases your maximum loan by roughly $15,000–$17,000 (depending on the interest rate and loan term).

Recent regulatory changes that affect HEM’s impact

Three major changes in 2026 directly interact with HEM:

• APRA serviceability buffer remains at 3% – meaning the floor for the assessed rate is 8.69% (lowest variable ~5.69% plus 3%). This buffer amplifies every dollar of expenses because it inflates the repayment cost.

• DTI cap of 6x from February 2026 – APRA imposed a maximum debt-to-income ratio of 6 times the borrower’s gross income. For a single earning $120k, the max loan is $720k regardless of how low HEM is. For high-income earners, the DTI cap is the binding constraint, not HEM.

• First Home Buyer Guarantee (FHBG) price caps updated July 2026 – the scheme now allows first home buyers to purchase with a 5% deposit and no LMI, but only up to certain prices: Sydney $1.5M, Melbourne $950k, Brisbane $1M, Perth $850k. If HEM suggests you can only borrow $750k, you may hit the cap but still need extra deposit. The FHBG changes do not alter HEM itself but can help if you are close to the threshold.

FAQ

Q: What is the current HEM figure for a single homeowner in 2026?
A: For a single person living alone, HEM is approximately $620 per week, or $32,240 per year. This includes basic necessities plus a share of discretionary spending based on the 50th percentile.

Q: If my actual living expenses are $40,000 per year, but HEM says $32,240, which figure will the bank use?
A: The bank will use the higher figure, which is your declared $40,000. Unless you can prove you actually spend less than HEM (through bank statements and a detailed budget), HEM does not reduce your assessed expenses. Your best move is to declare expenses as close to HEM as possible.

Q: Does the 6x DTI cap override serviceability based on HEM?
A: Yes, the cap is a hard limit. For a single borrower earning $80,000, the maximum loan is $480,000 regardless of what HEM suggests. If the serviceability calculator (using HEM) says you could borrow $550,000, the DTI cap trims it to $480,000.

Q: How much difference does a $100 per week reduction in assessed expenses make to my borrowing power?
A: A $100 per week ($5,200 per year) reduction in expenses increases your maximum loan by roughly $70,000 to $80,000 at current rates. That’s why it pays to minimise declared spending or, if you can, prove lower actuals.

Q: Can I choose to use HEM instead of my actual expenses if my actuals are higher?
A: No — banks are required to use the higher of the two. If you declare $60,000 and HEM is $49,400, they use $60,000. The only way to get HEM applied is to keep your declared expenses equal to or below HEM, which is rare for households with children or high housing costs.

Sources

1. APRA – “Serviceability Requirements and DTI Caps” (March 2026)
2. Reserve Bank of Australia – “Cash Rate Target” (July 2026)
3. Housing Australia – “First Home Guarantee Price Caps 2026–27” (July 2026)
4. Melbourne Institute – “Household Expenditure Measure Methodology” (2026 update)
5. ABS – “Household Expenditure Survey, 2023–24” (released 2025)

Ready to calculate your borrowing power?

HEM is just one piece of the puzzle. To see how it affects your maximum loan, use our interactive borrowing power calculator — it automatically applies HEM, the 3% buffer, and the 6x DTI cap. Calculate your borrowing power now.

Open a free borrowing power widget on your dashboard to see live estimates without leaving this page.

Learn more

• How much can I borrow in 2026? A complete guide
• APRA serviceability buffer explained: 3% still in force
• Why your borrowing power dropped in 2026 — the real reasons