Living Costs

How Lenders Assess Living Costs

Living costs form the second major deduction in the serviceability calculation, after existing debt repayments. The principle is straightforward: lenders deduct verified household living costs from net income, and the remaining surplus must be sufficient to service the proposed loan repayment (at the stressed rate) and meet minimum surplus thresholds.

The Household Expenditure Method (HEM)

The HEM is a benchmark measure of minimum household living costs, derived from ABS Household Expenditure Survey data. It scales with household size (the number of adults and dependants) and with income level — higher-income households carry a higher HEM floor.

The key practical point: lenders use the higher of the borrower's declared expenses or the applicable HEM benchmark.

If a borrower declares $3,000 per month in living costs and the applicable HEM is $4,500 per month, the lender uses $4,500. Declaring lower expenses than HEM does not reduce the assumed expense floor in the servicing calculation.

Where declared costs exceed HEM, the higher declared figure is used.

Why declaring low expenses does not always help

Many borrowers attempt to minimise declared expenses to maximise borrowing capacity. Under HEM, this strategy has limited impact up to the HEM floor. Below HEM, the benchmark applies regardless.

Above HEM, accurate declaration is important — both for responsible lending compliance and because bank statement analysis can reveal actual spending patterns that contradict low declarations.

Post-Hayne bank statement scrutiny

The 2019 Royal Commission (Hayne Inquiry) and subsequent ASIC RG 209 guidance requires lenders to take reasonable steps to verify actual living expenses, not simply accept self-declarations. In practice, lenders review 3–6 months of primary transaction account statements.

Red flags that may attract additional scrutiny or affect approval:

• Regular gambling transactions
• BNPL (buy now, pay later) services used frequently
• Accounts consistently at or near zero balance
• Unexplained or irregular large withdrawals
• Regular transfers to unidentified accounts
• Overdraft usage

Dependants and household size

Each additional dependant increases both the HEM floor and the assessed living costs. School-age children typically trigger a higher HEM adjustment. Private school fees are specifically assessed — they are a declared ongoing commitment above HEM, not subsumed within it.

Minimum surplus

After deducting all living costs and debt commitments from assessed income, a minimum net surplus is required by most lenders. If the resulting surplus is negative, or below the lender's required threshold, the application will not proceed at that loan size.

Pages in this cluster

• How living expenses are assessed
• Expenditure benchmarks (HEM)
• Household size and dependant costs
• Dependant costs detail
• Minimum surplus requirements
• Declared vs benchmark expenses
• Expense verification (bank statements)
• Discretionary spending
• Private school and education costs
• Understated expense decline conditions
• Stress-testing

Related clusters

• Existing Debts — for existing loan and credit card treatment
• Expenses and Commitments Pillar