Living expenses and the benchmark

Clients are famously optimistic about what they spend. Lenders know it, so almost none of them simply take the client's word. They compare the declared figure with a benchmark for a household like this one, and use whichever is higher.

The benchmark

The benchmark most Australian lenders start from is the Household Expenditure Measure (HEM), published by the Melbourne Institute. It estimates what a household of a given shape spends on the basics: groceries, utilities, transport, clothing, health, a modest amount on recreation. It rises with:

• the number of adults and children,
• household income (higher earners are assumed to spend more),
• and where the household lives.

Then each lender does its own thing on top. Some add a loading. Some use their own model instead of HEM. Some add specific costs, such as private school fees, childcare or rent, outside the benchmark. Some pick the income band from gross income, others from net. All of these are legitimate. Each moves the figure.

Why families feel it most

For a single person with no children, most lenders' expense figures sit fairly close together. Add a partner and three children and they spread out: each lender has its own view of what a child costs, at what age, and how much of the family's government payments it will count as income.

The same household, the same incomes, the same declared costs. The gap of $391k comes mostly from two places: the living-expense figure each lender lands on for three children, and whether (and how much of) the Family Tax Benefit counts as income.