The Hidden Calculator Deciding Your Loan Approval

Picture this: You earn $85K a year. Decent job, good credit score, no missed payments. You apply for a $35K car loan (something well within your means) and get declined. Meanwhile, someone earning $70K gets approved for $40K.

What on earth just happened?

Here's what your bank didn't tell you: There's a formula, created by a Melbourne-based institute, that calculated your living expenses for you. Without asking. Without seeing your actual spending. And it decided you can't afford that loan.

Welcome to the world of HEM, the Household Expenditure Measure. The secret calculator that's been deciding Australians' borrowing power for years, and why it just got a whole lot stricter.

HEM stands for the Household Expenditure Measure. It's a benchmark created by the Melbourne Institute of Applied Economic and Social Research, based on Australian Bureau of Statistics data analysing over 600 expense categories.

Think of it as a massive spreadsheet that sorts your life into three buckets:

HEM takes the median spend on absolute basics and adds the 25th percentile spend on discretionary basics (that's below-average spending, by the way). It updates monthly for inflation, which is why it's gotten noticeably tougher lately. And it varies dramatically based on your family size, location, and whether you've got kids.

Now here's where it gets interesting.

In 2019, the Banking Royal Commission pulled back the curtain on how Australian banks were really assessing loan applications. What they found wasn't pretty.

One of the Big Four got caught using HEM in 73% of loan applications instead of looking at borrowers' actual expenses. Why? Because it was faster. Easier. More "efficient."

The problem? Some people were getting loans they genuinely couldn't afford because their real expenses were higher than HEM estimated. Meanwhile, others were getting knocked back even though they were managing their money responsibly.

Banks preferred HEM because it meant they could process applications quicker without the hassle of thoroughly reviewing bank statements and asking uncomfortable questions about spending habits.

The Royal Commission called them out. Hard.

But here's the irony: The "fix" has made things tougher for everyone. Lenders have overcorrected. Where they once had flexibility to use your actual expenses if they were lower than HEM, most now use HEM as a strict minimum floor—even if you're genuinely spending less.

Here's the uncomfortable truth: Your income is only half the equation when lenders assess your application. The other half? What you're expected to spend just to exist.

HEM calculates your "minimum expected expenses" based on your household profile. And the differences are massive.

A single person living in Adelaide with no kids might have a HEM calculation of around $2,000 per month in living expenses. A couple with two kids in Brisbane? Try closer to $4,500 per month.

Same $85K income. Vastly different borrowing power.

Then lenders add your actual commitments on top—other loans, credit cards, rent or mortgage payments. Whatever's left after all that? That's your borrowing capacity.

And here's the kicker: Even if you're actually a frugal legend who lives on two-minute noodles and homemade coffee, lenders still use HEM as the minimum. They don't care that you personally spend less. The algorithm says you need $4,500 a month to survive as a family of four in Brisbane, so that's what they're using.

This is why you can earn good money and still get knocked back for what feels like a reasonable loan amount.

But here's what makes this even more frustrating: Most people drastically underestimate what they actually spend.

We had a customer last month—great income, solid credit score—who couldn't understand why she kept getting declined. When we sat down and went through her bank statements together, she'd been spending $200 a month on vending machines at work. She genuinely didn't realise. "It's just a couple of dollars here and there," she said.

Add the daily coffee run ($150+ per month), weekend Uber Eats orders, and three streaming services she'd forgotten she was paying for, and suddenly that $400-500 per month "missing" from her budget made perfect sense.

Lenders see this discrepancy. And they account for it.

HEM calculates discretionary spending at the 25th percentile—that's below-average spending in the population. So even if you think you're being conservative with your estimates, the algorithm is probably more conservative than you are.

You know that email you got? "Congratulations! You're pre-approved for $50,000!"

Here's the truth: You're probably not.

That email is marketing, not a guarantee. Look closely and you'll find the asterisk. The one that says "subject to assessment, credit criteria, and serviceability requirements."

Translation: "We think you might qualify based on your credit score alone, but we haven't actually looked at anything else yet."

Here's what "pre-approved" really means: The marketing department ran your credit score through a basic filter and decided you're worth sending an email to. That's it. The actual lending decision—the one that involves HEM calculations, bank statement reviews, employment verification, and all the rest—hasn't happened yet.

When you click that shiny "Apply Now" button, here's what kicks off:

This is when that $50K pre-approval shrinks to $32K. Or disappears entirely.

And here's the part that really stings: Every application puts a hard enquiry on your credit file. Multiple enquiries in a short period make you look "credit hungry" to other lenders. So by the time you've applied to three banks chasing that pre-approval promise, you've potentially made your situation worse.

Getting a "you're pre-approved!" email and then being declined feels like being invited to a party and then turned away at the door. But here's what's really happening: The marketing department sent that email. The risk department makes the actual lending decision. And they're using completely different information.

Alright, enough doom and gloom. Here's what you can actually control in this situation.

Before you apply for anything, know what you're actually spending. Not what you think you're spending. Not what you hope you're spending. What you're genuinely spending.

Most banking apps now have built-in expense tracking tools. Macquarie's is excellent. CommBank and NAB have solid options too. Use them. Filter your expenses by category for the past three months and look at the numbers honestly.

Or do it old school: Download three months of bank statements and go through them line by line with a highlighter and a calculator. Yes, it's tedious. Yes, it's worth it.

If you can't track your spending, how will you ever improve it? And if you don't know your real numbers, how can you have an honest conversation about what you can actually afford?

Here's something most people don't know: Brokers can run serviceability checks without putting a hit on your credit file.

We can plug your numbers into our systems, see how HEM calculations work for your specific household situation, and tell you "Based on this, you're looking at a $30K car, not a $50K one" before you fall in love with the wrong vehicle.

We know how different lenders interpret HEM. We know which ones have slightly more flexibility around the edges. We know which ones are strict by-the-book operations. And we can have these conversations with you at no cost, without any commitment, and without damaging your credit file.

Better to know upfront what's realistic than to go through the emotional rollercoaster of falling in love with a car, applying, getting declined, and then having to start over with a worse credit file.

We had a customer recently who came in wanting to borrow $50K for a nearly-new SUV. Based on his HEM calculation and existing commitments, he could comfortably service about $32K.

We could have sent him to a high-interest lender who'd approve the full $50K at 18% interest. We could have just told him we couldn't help and sent him on his way.

Instead, we showed him some excellent quality used options in the $28-30K range. Similar models, 3-4 years old instead of brand new, meticulously maintained, full service history. He drove away in a car he loves, with repayments of $140 per week instead of $235 per week.

That's $95 per week he can spend on his actual life – family dinners, school fees, the occasional weekend away – instead of on loan repayments. He's not stressed about money. He's not lying awake at night wondering how he'll make next month's payment. He's just enjoying his car.

Look, we know this whole system is frustrating, especially if you're genuinely responsible with money and don't understand why you're being treated like a risk.

But here's the uncomfortable truth: HEM exists because people were getting loans they couldn't actually afford.

Before the Royal Commission crackdown, banks were taking borrowers at their word. "How much do you spend on living expenses?" "Oh, about $1,500 a month." "Great, here's your $60K loan!"

Then unexpected expenses would hit—car repairs, medical bills, school fees, a broken hot water system—and suddenly that person couldn't make their loan repayments. Default. Damaged credit. Potential repossession. Years of financial stress and relationship strain.

If lenders took your word for it without any verification or buffer, you'd potentially be in serious trouble. HEM builds in a margin for life's surprises. The stuff you can't predict. The expenses that come out of nowhere.

We've seen the other side of this equation: Customers who came to us after overcommitting elsewhere, now in hardship, credit file damaged, genuinely struggling. The stress is real. The consequences last years.

Our job isn't to get you the biggest loan possible. It's to get you the right loan—one you can comfortably afford while still living your life. We want you to enjoy your new car, not stress about the repayments. We want you to be able to keep going on holidays, taking the kids out for dinner, maintaining the lifestyle that makes your life worthwhile.

HEM is real. It's not going away. And it's gotten stricter in the past few years, especially with inflation pushing those monthly expense estimates higher and higher.

‘Pre-approved’ doesn't mean approved. It means "we think you might be worth a closer look, but we haven't actually checked yet."

Your actual expenses matter. Track them honestly. Understand where your money really goes.

The algorithm doesn't know your life, but your broker should. We know how HEM calculations work for your specific situation. We know which lenders have more flexibility. We can run the numbers before you apply anywhere—no credit file hit while you're figuring it all out.

We've seen enough applications to know the difference between "you genuinely can't afford this" and "this particular lender isn't the right fit for you." We'd rather have an honest conversation now than watch you get declined later, cop a credit enquiry on your file, and end up more stressed than when you started.

Think of it like this: Would you rather find out you can afford a $30K car before you fall in love with a $50K one? Or after you've been declined and copped a credit enquiry that'll sit on your file for five years?

We'll run the numbers. We'll tell you what's realistic. And we'll find you the best option for your actual situation – not what some algorithm thinks your situation should be.