How Your Spending Habits Could Make or Break Your Home Loan Approval

When applying for a home loan, many people assume the biggest factor in the bank’s decision-making process is income. While income certainly matters, lenders are just as focused on how much you spend. Your spending habits tell banks how you live, how much you can reasonably afford to repay, and whether you may be at risk of financial stress if interest rates rise or your circumstances change and this can influence your home loan approval.

In Australia, the Household Expenditure Measure (HEM) is central to this assessment. It acts as a benchmark for living costs that lenders use to test loan affordability. For prospective borrowers—whether single, married, or raising children—understanding how banks view spending habits and how HEM works can make a significant difference in your chances of approval.

Why Banks Care About Spending Habits and Home Loan Approval

Banks have a responsibility under the National Consumer Credit Protection Act (NCCP) to lend responsibly. This means they must take steps to ensure you can afford your repayments without suffering financial hardship.

To do this, banks carefully examine:

• Your income – salary, rental income, dividends, bonuses.

• Your existing debts – credit cards, car loans, personal loans.

• Your living expenses – food, utilities, childcare, transport, entertainment, insurance, and more.

  
  

It is this third category—living expenses—that is often the most complex. Unlike income or debt, which are fixed and easy to verify, living expenses are variable and subjective. Everyone spends differently. One person may live frugally while another may have a higher lifestyle cost.

From the bank’s perspective, excessive or poorly managed spending raises red flags. If you are living beyond your means, or if your discretionary expenses are unusually high, the bank may worry that you won’t have enough buffer to handle unexpected costs or future interest rate rises.

What is HEM?

The Household Expenditure Measure (HEM) is a benchmark developed to estimate a “reasonable” level of household spending. It is based on data from the Australian Bureau of Statistics (ABS) and the Melbourne Institute, covering thousands of households across different income brackets and family structures.

Banks use HEM as a minimum standard when assessing expenses. In other words:

• If your declared living expenses are below HEM, the bank will usually increase them up to the HEM benchmark in their assessment.

• If your declared expenses are above HEM, the bank will use your higher figure instead.

  
  

This ensures that loan applicants can’t understate their expenses to make themselves look more creditworthy. For example, if you’re a single adult declaring living expenses of $1,000 per month, but HEM data for your profile suggests $2,000 per month is a more realistic baseline, the bank will assess your borrowing capacity using the $2,000 figure.

Why HEM is So Important

HEM plays a vital role in determining how much you can borrow. Even if you earn a high income, your borrowing capacity will be capped if your living expenses—either declared or benchmarked by HEM—are considered high.

A small difference in assumed living costs can mean tens or even hundreds of thousands of dollars in reduced borrowing power. For instance, an increase of $500 per month in assessed living expenses can reduce maximum borrowing capacity by around $70,000–$90,000, depending on the lender’s calculations and the interest rate applied.

This is why applicants often feel frustrated when their high salaries don’t translate into the loan amounts they expect. The bank isn’t just looking at income; it’s subtracting realistic living expenses before working out how much is left to service the loan.

How Banks Assess Your Spending

While HEM is a baseline, banks don’t stop there. Since the 2018 Banking Royal Commission, lenders have been under greater scrutiny to test living expenses more thoroughly. Today, most lenders require a breakdown of spending across multiple categories, including:

• Housing costs (rent, rates, insurance)

• Utilities (electricity, water, gas, internet, phone)

• Transport (fuel, public transport, vehicle costs)

• Groceries and personal care

• Childcare and education

• Medical and health expenses

• Entertainment, travel, and discretionary spending

  
  

Applicants are often asked to provide 3–6 months of transaction statements so the bank can cross-check declared expenses with actual spending. If your bank statements show high discretionary spending, such as frequent dining out or travel, the lender may question whether you can realistically cut back to meet mortgage repayments.

Single Applicants

For single applicants, banks generally expect lower household expenses than couples or families, but HEM still provides a floor that can’t be avoided.

Key considerations:

• Lower household costs – Singles don’t have to support dependents, so expenses like childcare or schooling don’t apply.

• Lifestyle spending – Banks may scrutinise discretionary spending more heavily for singles, as it can make up a larger share of total outgoings.

• Borrowing power – While singles benefit from lower assessed living costs, their borrowing capacity is limited by having only one income source.

  
  

For instance, a single person earning $90,000 may be capped in borrowing power not just by income but also by how their spending compares to HEM.

Married or De Facto Couples

For couples, lenders will generally assume higher household spending than singles, but the presence of two incomes can boost overall borrowing power.

Key considerations:

• Shared expenses – Couples may benefit from shared costs (like rent or utilities), but HEM assumes higher base expenses than for singles.

• Income balance – If one partner earns significantly more, the lower-earning partner’s expenses are still factored in.

• Joint discretionary spending – Dining out, holidays, and subscriptions are often higher in couples, which lenders will pick up from bank statements.

  
  

A dual-income couple earning $150,000 combined may still find their borrowing capacity limited if their assessed expenses—whether actual or HEM—are high relative to income.

Families with Children

Practical Tips for Applicants

Understanding how banks use HEM and assess spending can help you prepare for your application:

1. Review your spending habits early – 3–6 months before applying, try to cut back on discretionary spending. Banks often average your expenses over this period.

2. Categorise expenses accurately – When completing loan applications, ensure you provide a realistic but not exaggerated breakdown of spending.

3. Close unused credit facilities – Even unused credit cards count towards liabilities and reduce borrowing capacity.

4. Be prepared for higher assessments – Even if you live frugally, banks will use HEM as a floor, so don’t assume your actual costs will be accepted.

5. Seek professional advice – A mortgage broker can help identify lenders with more flexible approaches to assessing living expenses.

   
   

Why It Matters

At its core, the focus on spending habits and HEM reflects the banks’ priority: ensuring that borrowers don’t take on debt they can’t manage. For applicants, this means:

• Transparency – You need to demonstrate a clear and sustainable budget.

• Realism – Banks won’t simply accept your declared figures if they’re below community benchmarks.

• Impact – Singles, couples, and families are all affected differently, but no one is exempt from HEM.

Borrowers who understand these dynamics can better position themselves to maximise borrowing power while still presenting a responsible and sustainable financial picture.

Final Thoughts

Applying for a home loan is no longer just about showing a payslip and a deposit. Banks now want to see how you live, how you spend, and whether your lifestyle is compatible with long-term mortgage repayments.

The Household Expenditure Measure is central to this process. Whether you’re single, married, or raising children, HEM ensures that your loan application is stress-tested against a realistic standard of living. For some, this may reduce borrowing capacity compared to expectations, but it also provides protection—helping ensure you can sustain your loan not just today but for years to come.

By understanding what banks look for and preparing accordingly, applicants can present themselves in the best possible light—balancing lifestyle choices with the financial discipline needed to secure a home loan.