The Household Expenditure Measure (HEM) is a key tool used by lenders in Australia to gauge how much you typically spend on living expenses, helping them assess your borrowing capacity.
Purpose of HEM
Financial Assessment: Lenders use HEM to estimate a borrower's minimum monthly living expenses based on their income, family size, and location. This helps in evaluating whether the borrower can afford the mortgage along with their other expenses.
Standardization: HEM provides a standardized measure of household expenses, which helps lenders maintain consistency when assessing different borrowers. It helps in making objective comparisons between applicants.
How HEM is Calculated
Income Brackets: HEM estimates are typically based on different income brackets. The measure provides average expenditure figures for households within these brackets.
Household Composition: The measure takes into account factors such as the number of people in the household, which affects overall living expenses.
Geographic Variation: HEM also considers geographic differences in living costs, recognizing that expenses can vary significantly between regions.
Impact on Mortgage Applications
Borrowing Capacity: By using HEM, lenders can determine how much of the borrower’s income is realistically available for mortgage payments after accounting for standard living expenses. This affects the maximum loan amount a borrower can be approved for.
Risk Management: HEM helps lenders manage risk by ensuring that borrowers are not overstretching themselves financially. It aims to reduce the likelihood of defaults by ensuring that borrowers have a cushion for unexpected expenses.
Regulatory Compliance: In some regions, using measures like HEM helps lenders comply with regulations designed to promote responsible lending and protect consumers from taking on unmanageable debt.
Example
Suppose you are applying for a mortgage and your lender uses HEM to evaluate your application. They would look at your income, family size, and location, and compare these against the HEM guidelines to estimate your minimum household expenses. If HEM suggests that a typical household in your situation spends a certain amount on essentials, the lender will use this information to determine how much of your income can reasonably go towards mortgage payments.
Limitations
Generic Estimates: HEM provides average figures and may not capture individual circumstances. Your actual expenses might be higher or lower than the standard estimates.
Changing Costs: Living costs can change over time, and HEM figures may not always reflect the most current data.
Overall, HEM is a valuable tool for lenders to gauge a borrower’s financial situation and ensure responsible lending practices. Any questions about HEM? Contact your professional mortgage brokers at MoreMore Finance to get more information.
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