Weekly Finance Update - What is HEM and why is it important? - Mortgage Domayne

Weekly Finance Update – What is HEM and why is it important?

February 25, 2023

Welcome to the finance update for the week ending 25 February, 2023.

This week as expected, lenders increased their standard variable rates with Westpac remaining the most competitively priced. Whilst there were no surprises in that, it is interesting to note that not all lenders increased their one year fixed interest rate, which perhaps suggests that they expect rate increases to cease in the very near future. Updated rates can be viewed in the tables below.

In this week’s newsletter, we look at the Household Expenditure Measure (HEM) benchmarking tool, a somewhat invisible assessment tool applied by lenders in the loan approval process.

What is the Household Expenditure Measure (HEM)?

The HEM is a standard benchmark that banks use to estimate people’s annual living expenses when considering home loan applications. It classifies more than 600 items in the Australian Bureau of Statistics’ Household Expenditure Survey as absolute basics, discretionary basics or non-basics.

HEM is a net-of-housing costs measure, reflecting median spend on absolute basics plus the 25th percentile spend on discretionary basics.

How is it used?

It is used by lenders to assess borrowing capacity and help determine if applicants can afford a home loan.

Why are living expenses important?

Whenever a person applies for a home loan, lenders are required by law, under the National Consumer Credit Protection Act to consider their living expenses (among other factors), in order to provide a fuller picture of their financial situation and whether they’ll be able to pay back the loan.

What sort of expenses are included in HEM?

Some of the expenses included in HEM are –

  • Groceries
  • Transport
  • Childcare
  • Entertainment and recreation
  • Utilities
  • Education
  • Clothing and personal care
  • Medical, health and fitness
  • Insurance
  • Children and pets (childcare, sports, tuition, pet expenses)
  • Communication (internet, phone bill)

Any changes in interest rates from last week are highlighted in orange.

Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.

Standard Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.