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When it comes to your home loan application, why are living expenses so important?

When you apply for a home loan, the lender will assess a range of factors to determine whether or not you can afford to repay the money you borrow. One of the factors the lender will take into account is your living expenses, including the amount you spend on your groceries, utilities and entertainment.

Getting a clear picture of your living expenses will help lenders to determine how big a home loan you’re likely to be able to handle. But filling out a living expenses declaration can be a useful exercise for you as well. When you’re able to identify where your money goes each month, you may also be able to identify potential areas where you can cut costs.

How are living expenses calculated?

There are two main methods that Australian lenders use to calculate the living expenses of mortgage applicants: the Household Expenditure Measure (HEM) and the Henderson Poverty Index (HPI).

The Household Expenditure Method

The HEM is the more widely used of the two methods and is based on more than 600 items in the ABS Household Expenditure Survey (HES). The HEM is calculated as the median spend on absolute basics (food, utilities, transport, communications, kids’ clothing) and the 25th percentile spend on discretionary basics, which includes expenses like alcohol, eating out and childcare. Non-basic expenses, for example overseas holidays, are excluded from calculations. Rent or mortgage payments are also not included in the HEM.

The Henderson Poverty Index

The HPI is less commonly used and was originally based on a survey of New York families in the 1950s, but has been updated using more recent Australian survey data. The index is calculated based on a family of two adults and two children, and it can be multiplied by a specific fraction to calculate a figure that applies to different family structures.

When you apply for a home loan, you need to provide information about your living expenses. With some lenders this will simply mean providing a rough estimate of your weekly or monthly spend on essentials like rent, groceries, transport and utilities, but other lenders provide detailed calculators to garner a more accurate picture of your ongoing commitments.

The lender will then compare the living expenses figure you provide with the relevant HEM or HPI calculation for someone who lives in your area and has the same number of dependants. The higher of these two figures is then used as the basis to determine how much you can afford to borrow and comfortably repay.

Basic property expenses

A living expenses declaration will first want to know what you spend on some basic property expenses. These include payments for things like council rates, utilities, repairs and/or body corporate fees. This can be calculated by looking at your quarterly spend on these items and dividing it by three to find your monthly spend.

Household necessities

Lenders will also want to know how much you spend each month on necessities such as food, clothing and transport. Many lenders will break these necessities into separate categories.

When calculating your spend on necessities, you should take the extra effort to calculate accurately. It’s easy to greatly underestimate the amount we spend on things like groceries and clothing. Take the time to look at a few bank statements to get an idea of your average monthly spend. Not only will this give lenders a more accurate picture of your ability to service a mortgage. It will give you insight into areas where you might be overspending.


You’ll need to provide information about your regular insurance payments. These could include health insurance, car insurance, home and contents insurance, life insurance and TPD.

Debt obligations

If you have a credit card or any other liability such as a personal loan, car loan or HECS loan, you’ll need to include this in your calculation of your monthly expenses. This can also give you a good idea of your credit situation. If you find you’re making regular monthly repayments on several credit cards or loans, you may want to consider consolidating your debt into a personal loan or a 0% balance transfer credit card.


Lenders may also want to know the details of your monthly spend on the Internet, mobile phones and pay TV or streaming services. Again, calculating these expenses can give you a clearer idea of whether there’s an opportunity to save money by switching to a more competitive Internet or phone plan.

Childcare and/or school fees

If you have children, you’ll need to provide details about any childcare fees or regular school fees you have to pay. These can also include fees for school uniforms and additional school activities.

Medical expenses

If you have any regular medical expenses such as those for prescriptions or ongoing medical care, lenders will want to know your monthly spend.


In this category, lenders will ask you to provide information on the amount you would typically spend on entertainment and leisure. This includes both activities and discretionary items such as alcohol.


If you have any other regular monthly expenses that don’t fall into the categories listed above, you’ll want to list them here.

Adding together all the categories above will give you a good idea of your monthly spend. To give you an idea of how you compare to the average Australian, the HEM calculation for a family of two adults and two children living a moderate lifestyle with a mortgage in NSW is $6,566 in monthly expenses. If you’re in a similar living situation and you find that your expense calculation is coming in considerably higher than this, you may want to take a look at your outgoings and see if there are any expenses you can cut down on.

Filling out a living expenses declaration is necessary in order to get a home loan from many lenders. However, it’s also a useful exercise for you as a borrower. By getting a more accurate look at your monthly outgoings, you’ll be in a much better position to determine whether you’re ready to take on the financial commitment of a home loan. If you have any questions at all, contact Geoff today!