How Do Living Expenses Affect Home Loan Approval?

How Do Living Expenses Affect Home Loan Approval?

Living expenses reduce the income a lender can treat as available for loan repayments, so higher assessed expenses generally mean lower home loan borrowing capacity. Lenders compare the expenses you declare with a benchmark such as the Household Expenditure Measure (HEM), check them against your statements, and may use the higher figure. Policies vary by lender, and nothing here guarantees approval.

Quick Answer

Lenders work out what is left of your income after tax, living expenses and existing debts, then test whether it can cover new repayments at a higher assessment interest rate. The more your living expenses are assessed at, the less is left, and the lower your borrowing capacity may be.

Most lenders compare your declared spending with a benchmark such as HEM and may use whichever figure is higher. They may also review your bank and credit card statements.

Two households on the same income can be assessed very differently, because expenses, dependants, debts and lender policy all change the result.

Key Takeaways

Expenses reduce borrowing capacity. Every dollar assessed as living costs is a dollar a lender cannot count towards the new repayments.

Benchmarks are a floor, not a ceiling. Lenders commonly compare your declared expenses with HEM and may use the higher figure, so declaring a low number may not lower what is assessed.

Your statements matter. Lenders may review bank and credit card statements to see whether declared expenses match actual spending.

Accuracy protects you. Understating expenses can lead to a decline, and can leave you with repayments that are hard to meet.

Lenders vary. Expense categories, benchmarks and verification methods differ between lenders and change over time.

How Living Expenses Fit Into a Serviceability Assessment

Serviceability is a lender’s test of whether you can afford a loan. It builds a picture of your monthly surplus: assessable income, less tax, less living expenses and existing debt commitments. The lender then checks that surplus against the repayments on the new loan.

That test is run at a higher interest rate than the one you would actually pay. APRA, the prudential regulator, requires authorised deposit-taking institutions (ADIs) to assess new borrowers at a rate above the loan’s actual rate, and confirmed on 28 May 2026 that the mortgage serviceability buffer remains at 3 percentage points. Non-bank lenders are not governed by APRA’s ADI standards in the same way and set their own credit policies, so their approach can differ.

Because expenses are subtracted before the repayment test, they are one of the few inputs that can move borrowing capacity as much as income does. Income is covered in more detail in our guide to how income affects borrowing capacity [VERIFY VIP FINANCE URL].

What Is HEM and How Do Lenders Use It?

HEM stands for Household Expenditure Measure. Developed by the Melbourne Institute at the University of Melbourne, it estimates modest household expenditure using data from the Australian Bureau of Statistics’ 2015–16 Household Expenditure Survey, with expenditure estimates adjusted using expenditure-specific inflation data. It combines median spending on essential items with the 25th percentile of spending on discretionary basic items. The measure is updated quarterly using expenditure-specific inflation data. Many Australian lenders use a HEM-style benchmark as a reference point when they assess home loan applications.

What HEM generally varies by

Household composition, including the number of adults and children

Household income category

Location, including state and metropolitan or non-metropolitan areas

HEM is a statistical benchmark for a household in a similar situation. It is not a measure of what you personally spend, and each lender decides how to use it. Some lenders use their own internal benchmarks or a modified version, so the figure used for the same household may differ between lenders.

What HEM may not cover

HEM is commonly described as covering essential spending plus a modest allowance for discretionary items. It generally does not include rent, existing mortgage repayments or other debt repayments, and costs such as private health insurance or private school fees may be assessed separately. How these are treated depends on the lender.

Declared Expenses vs HEM: Which One Counts?

You are usually asked to declare your expenses in an application. A lender may then compare your declared figure with the benchmark for your household. If your declared expenses are lower than the benchmark, many lenders may assess the benchmark instead. If they are higher, the lender may assess the higher declared amount.

ASIC’s responsible lending obligations require credit licensees to make reasonable inquiries about a borrower’s financial situation and take reasonable steps to verify the information provided. For authorised deposit-taking institutions (ADIs), APRA’s residential mortgage lending guidance also expects lenders using HEM or another expenditure benchmark to consider the greater of the borrower’s declared living expenses or an appropriately scaled benchmark. A benchmark should not replace consideration of a borrower’s actual financial circumstances.

So a low declared figure does not necessarily lower the amount a lender assesses, and a very high one may reduce capacity. This is why an accurate declaration matters more than a favourable one.

What Counts as Living Expenses?

Lenders usually group expenses into categories. The table below describes common groupings. It is general information, not any single lender’s form.

Category	Examples	Notes
Everyday essentials	Groceries, utilities, phone and internet, transport and fuel, clothing, personal care	Usually the core of the assessment
Insurance and health	Health insurance, car and contents insurance, medical costs	May be assessed separately from the benchmark
Children and education	Childcare, school fees, school costs, children’s activities	Can increase assessed expenses, especially with dependants
Discretionary spending	Dining out, entertainment, subscriptions, holidays, gifts	Often reviewed against statements
Housing costs	Rent or board, council rates, strata or body corporate fees	Rent may be treated differently if it will end after settlement
Debt commitments	Car loans, personal loans, credit cards, buy now, pay later, HELP repayments	Usually assessed separately as debts, not as living expenses

Treatment depends on the lender. A category that is combined into one benchmark at one lender may be itemised at another.

Why Your Bank Statements Matter

Lenders may ask for recent bank and credit card statements and compare what you declared with what the statements show. Regular spending patterns, such as frequent dining out, subscriptions or buy now, pay later repayments, may be taken into account even if they were not listed.

Moneysmart recommends reviewing bank statements and app transactions over the past few months to understand regular and occasional expenses. It also suggests tracking daily spending over the next couple of weeks to identify spending patterns, subscriptions and hidden costs. Doing this before applying can help you prepare a more accurate picture of your household expenses.

Why Two Households Can Be Assessed Differently

Number of dependants:

more children or dependants generally increases assessed expenses.

Income level:

benchmarks commonly scale with income, so a higher-income household may be assessed at higher living costs.

Location:

living costs differ across regions and capital cities.

Lender policy:

each lender chooses its benchmark, categories and verification approach.

Actual spending:

a household that spends above the benchmark may be assessed at its higher actual spending.

Practical Australian Examples

These scenarios are hypothetical. Dollar figures are illustrative only and are not real HEM values or lender assessments.

Example 1: Declaring less than the benchmark

A single applicant declares $2,200 a month in living expenses. For a household like theirs, a lender’s benchmark is, say, $2,800 a month. The lender may assess the higher $2,800 figure, so the lower declaration does not increase borrowing capacity.

Example 2: A family with school fees

A couple with two children pays private school fees. A lender may assess the benchmark for their household, then add or separately consider the school fees. Their assessed expenses may be noticeably higher than a couple without that commitment, and their borrowing capacity may be lower even on the same income.

Example 3: Spending above the benchmark

A couple’s statements show regular dining out, travel and several subscriptions, putting actual spending above the benchmark for their household. A lender that reviews statements may assess the higher actual figure. Trimming genuine, ongoing costs over time may change what shows up in future statements.

Example 4: A renter buying their first home

An applicant currently pays $2,000 a month in rent. After settlement, rent will stop and the new loan repayments will start. Some lenders may exclude the rent from assessed expenses once the purchase settles, while still testing the new repayments at the assessment rate. Treatment varies by lender.

Can You Reduce Assessed Expenses Before Applying?

This is general information, not personal advice. Some approaches are legitimate, and others can cause problems:

Track your real spending first, using statements or an app, so your declaration is accurate.

Review recurring costs, such as unused subscriptions or services you no longer use.

Review credit cards and limits. Lenders generally consider the card limit as a potential repayment, so closing cards you do not use may help. Check any closure conditions first.

Pay down or clear small debts, where that makes sense for your finances, because debt commitments are assessed alongside living expenses.

Do not understate expenses. Declaring less than you really spend can lead to a decline or a loan that is hard to afford, and may breach the lender’s requirements.

Genuine changes that show up consistently in your statements over time are generally easier for a lender to recognise than last-minute changes.

Costs, Risks and Limitations

Borrowing capacity is not affordability. Moneysmart advises leaving yourself breathing room rather than borrowing the most a lender will allow.

Costs rise after you buy. Moneysmart notes that new costs, such as council rates, can take time to get used to once you own a home.

Benchmarks are averages. HEM describes a typical household, not yours, so your real spending may be higher or lower.

Lender policies change. Benchmarks, categories and verification rules can change, so earlier results may not hold.

Calculators are estimates. Online tools use simplified assumptions and do not replicate a lender’s full assessment.