Fair Calculation of Household Expenses
In Australia, most lenders use the Household Expenditure Measure to assess an applicant’s borrowing power. Your borrowing power plays an important part in whether or not your application will be accepted or rejected. While the Household Expenditure Model (HEM) is widely used among lenders, it’s not always accurate and can cause lenders to miscalculate your living expenses and borrowing power. Its inaccuracies could leave you struggling to make loan repayments or cause your application to be denied altogether.
The Basics of the Household Expenditure Measure
The HEM is a government guideline. Banks and other lenders use this guideline to estimate living expenses based on the size of an applicant’s household. Essentially, the HEM is the median amount spent on the basic essentials based on your lifestyle, location, and the size of your family. This amount is then added to the 25th percentile of the amount of money the average family in the same area spends on non-essentials, such as takeout, childcare, and entertainment.
There are two big problems associated with using the HEM to calculate borrowing power. For one, it doesn’t discriminate between non-essentials you can cut to increase your budget and non-essentials you need, like childcare. It also uses the average family and doesn’t take into account your own budget and financial situation. Both of these factors could leave you with a home loan you cannot afford to repay or could result in your application being denied or a smaller home loan when you can afford a larger one.
The Mortgage House Difference
At Mortgage House, we don’t use the HEM when calculating your borrowing power. Instead, we use your financial statements to get an accurate look at your income and living expenses. We use this complete picture to find a home loan that reflects your actual financial situation.