RateCity, HILDA & the HEM effect

RateCity, HILDA & the HEM effect

RateCity, HILDA & the HEM effect


Everyone knows that a writer can manipulate stats to say what the writer wants. And there are a lot of doom and gloom stats. Cost of living is a big, hairy, scary one at present, and mortgage stress is on the cards for many.

Here comes the HEM

Household Expenditure Measure (HEM) is the cost of living benchmark banks use to estimate a loan applicant’s annual living expenses. This measure is run through the lenders computer and is used to determine your borrowing capacity. The HEM is based on the ABS Household Expenditure Survey and attempts to ascertain, unsurprisingly, household expenditure.  The HEM is based on a number of factors (excluding mortgage payments or rent), including the state the borrower lives in, the number of dependent children and a bank-selected ‘lifestyle’ category.

Yes, that’s right. The BANK selects the lifestyle category it THINKS applies to YOU.

The lifestyle categories are:

  • Student
  • Basic
  • Moderate
  • Lavish

and according to UBS, ‘in the vast majority of cases the ‘basic‘ lifestyle assumption is used’. Scary huh.

What happens when the Bank is selecting the type of spender it thinks you are?

Well, quite often it gets it wrong. The chart below shows the massive variance between a ‘Basic’ lifestyle and a ‘Lavish’ one. It is easy to understand why some people are declined credit, while others have banks throwing funds at their feet.

Gross Income Basic living expense Basic borrowing limit Lavish living expenses Lavish borrowing limit
$80,000 $32,400 $337,985 $50,000 $195,912
$100,000 $32,400 $484,315 $58,320 $327,000
$125,000 $32,400 $643,892 $68,320 $465,615
$150,000 $32,400 $817,340 $78,320 $538,622
$200,000 $32,400 $1,144,225 $88,320 $792,804
$500,000 $32,400 $3,141,171 $108,320 $2,472,763

Meet Jack & Jill

Newlyweds Jack & Jill are full time employees living in Sydney. They have no kids, take an overseas holiday once a year and rent in a Yuppie area (do people still use the word Yuppie or have I showed my age?). Jack & Jill can expect the bank to assess them at about $682 per week or $35,500 pa living expenses.

In years gone by Jack & Jill may have stated living expenses of $700 per month plus rent of $2000 per month but HEM’s standardises expenses.

The fatal flaw in this system is that 2 couples living next to each other, working similar jobs, with no kids will be assessed as apples and apples.

Theoretically one may be a great saver, lives by their budget and forsakes the daily takeaway coffee and smashed avocado, while the other is living large.

It is not a perfect system but one most lenders work with – and it has certainly limited the borrowing capacity for some.

How much do you really need to avoid mortgage stress?

RateCity have given an overview, based on median house prices, of how much is needed firstly to buy your dream home and secondly, avoid mortgage stress.

Mortgage stress is classified as the point your mortgage repayments exceed 30% of your pre-tax income. In Sydney, a gross income of $161,000 and a $¼ million deposit will have you ticking along – anything less and you are mortgage stressed.

The Household Income and Labour Dynamics in Australia (HILDA) survey showed home ownership rates among Australians aged 18 to 39 have plunged to 25 per cent.

“Even for those in this group who manage to buy a home, mortgage debt has risen dramatically,” said Roger Wilkins from the University of Melbourne. “In 2002, 89 per cent of homeowners in this age range had mortgage debt. By 2014 this had risen to 94 per cent.”

The elephant in the room in all this is credit card debt with Australians more likely to be in default on cards than homes.

So what does this all mean for the average Joe….. or Jack & Jill?

Sadly for many, the HEM has a negative effect.  Whether it is selection of a ‘lavish’ lifestyle when a ‘basic’ would suffice or vice versa the impact on the borrower can’t be understated:

1) It is harder to get a loan

2) It is getting harder to refinance. Some clients who could service their debt with one bank 2 years ago may find they now don’t qualify

3) Personal debt is a major contributor to mortgage stress


Economies need people buying houses but they don’t need defaults. The handbrake had to be applied and for now it is holding.

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