Living Expenses Home Loan Application: What Lenders Check

When Australians apply for a mortgage, lenders do not simply check income and compare it with the advertised repayment. They run a fuller serviceability test that asks a harder question: after tax, after existing debts and after everyday living costs, is there still enough room in the household budget to repay the loan if conditions worsen, which is why a living expenses home loan application is reviewed so closely.

That matters more in 2026 because loan sizes remain large. The ABS reported that the average owner occupier loan size in Australia reached $736,000 in the December 2025 quarter, with NSW at $873,000. At those debt levels, small differences in assessed monthly expenses can affect borrowing capacity.

What Counts As a Living Expense in a Mortgage Application

In practice, living expenses are much broader than groceries and power bills. Major lenders ask about food, utilities, transport, insurance, education, child care, medical costs, subscriptions, entertainment, pet costs and spending for dependants. CommBank’s monthly living expenses template also separates out categories such as children and pets, insurance, transport, public education and “other additional expenses”, which includes private education, personal insurance and overseas travel.

ANZ’s home loan checklist makes the same point in plain language. It says borrowers will be asked about basic spending such as food, utilities, household costs and clothing, but also about private schooling, pet care, child care and foreseeable changes to expenses. That last part is important because lenders are not only interested in what we spent last month. They want to know what the budget will look like after settlement.

Why Declared Spending Gets Benchmarked and Stressed

Australian lenders still use borrower specific numbers, but they do not rely on them blindly. APRA says living expenses are a key component of serviceability and notes that banks often use measures such as HEM in loan calculators. It also says that relying solely on those indices would generally not be sound practice, and expects lenders to use the greater of the borrower’s declared living expenses or an appropriately scaled benchmark.

That is where many borrowers come unstuck. If someone declares an unusually low figure for a couple with children, the lender may substitute a higher floor. NAB states this openly in its borrowing calculator assumptions: if the expenses entered are lower than the Household Expenditure Measure, NAB will use the HEM figure instead. The Melbourne Institute describes HEM as a modest expenditure benchmark built from basic and discretionary basics, and it is a net of housing costs measure. Rent and mortgage repayments are not built into HEM, so lenders add housing costs separately.

Serviceability is then tested under pressure, not at the headline rate alone. APRA has kept the mortgage serviceability buffer at 3 percentage points and requires banks to apply at least that minimum above the loan rate. APRA’s mortgage guidance also says prudent serviceability models include buffers for potential rises in interest rates, increases in living expenses and decreases in income. So the assessment is not “can you repay today”, but “can you still repay if the budget tightens”.

What Lenders Check Beyond Your Monthly Estimate

How Statements, Liabilities and Undeclared Commitments Are Reviewed

ASIC’s responsible lending guidance says credit providers must make reasonable inquiries about a consumer’s financial situation, take reasonable steps to verify it and assess whether a loan is not unsuitable. In mortgage terms, that means a lender is expected to go past a rough verbal estimate.

APRA’s Prudential Practice Guide 223 is more specific. It says banks typically assess and verify income and expenses with regard to the borrower’s circumstances, and that they should have effective procedures to verify existing debt commitments and identify undeclared debts. It also says lenders should retain documentation supporting income and expense verification.

That is why statements matter. ANZ tells applicants to gather payslips, bills and credit card and bank statements before using its living expenses tool, and recommends reviewing transactions, bills or app spend summaries before the interview. If ongoing rent will continue after purchase, ANZ asks for the last three months of statements showing rent payments. That is a practical example of how lenders test whether the declared number matches actual behaviour in a living expenses home loan application.

Credit limits also matter, even when the card is rarely used. Westpac says credit card limits count as debt for borrowing power purposes even if nothing is owing at the time, and ANZ’s borrowing power calculator asks for total credit card limits rather than just current balances. APRA goes further and says it is prudent for lenders to assess revolving debt using a suitably prudent repayment period, giving the example of 3 per cent a month on the total committed limit.

Which Expense Lines Often Reduce Borrowing Power Faster Than Expected

The biggest reductions usually come from costs that are regular, unavoidable and easy to evidence. In a lender assessment, these items usually carry more weight than a one off discretionary purchase. The expense categories and debt commitments lenders expressly ask about or factor into serviceability commonly include the following.

Child care, school fees and recurring costs for children
Rent that will continue after settlement, or housing costs attached to another property
Insurance, health costs and regular medical spending
Personal loans, car finance, credit card limits and HELP repayments

This is where household structure really matters. APRA says serviceability criteria should look at stressed repayments to income, net income surplus and other debt servicing measures, while living expenses sit inside that surplus calculation. If we apply as a couple with dependants, the lender is not just looking at combined income. It is looking at how much of that income is already spoken for every month.

Recent cost data helps explain why lenders are cautious. The ABS said living costs rose across all household types in the year to the December 2025 quarter, with annual increases ranging from 2.3 per cent to 4.2 per cent. Housing, food and non alcoholic beverages, and recreation and culture were among the main contributors. If household costs are rising, a lender that accepts a stale or understated expense figure is more likely to overestimate borrowing capacity.

How to Present a Lender Ready Expense Picture

Borrowers do not need a perfect spreadsheet, but they do need a realistic one. The strongest applications usually show that the declared expense figure can be explained, documented and sustained after the purchase. That aligns with APRA’s expectation that income, expenses and debt commitments be verified and that future changes in a borrower’s position be considered where relevant. For borrowers working with Empower Money, this is often where preparation before lodgement can make the file easier for a lender to assess.

Simple Ways to Prepare Before You Apply

Review at least the last few months of transaction history and bills, not just memory. ANZ explicitly points borrowers to transactions, bills and spend summaries because rough guesses tend to understate irregular costs.
Separate current spending from future spending. Add in home insurance, council rates, strata, commuting changes, child care changes or rent that will continue after settlement, because lenders ask about foreseeable changes and ongoing housing costs.
Check revolving debt and other commitments. Unused credit card limits, personal loans and HELP can all affect serviceability even if they feel manageable day to day.
Be ready to explain any low expense figure. If your declared number sits below a benchmark such as HEM, the lender may lift it anyway or ask for more evidence.

A good rule is to assume the lender will care most about recurring commitments, not heroic one month frugality. If we cut spending sharply for six weeks before pre approval, but our usual statements show a higher run rate, the higher figure is likely to carry more weight. That is consistent with APRA’s view that actual living expenses may not be well captured by a benchmark alone and with lender processes that compare declarations against documented transactions.

The same logic applies to couples and families whose spending is changing. A new baby, the end of parental leave, private school entry, a planned car replacement or a move from living with family into an owner occupied home can all change the true post settlement budget. APRA’s guidance says prudent lenders should consider future changes in income and expenses, not just current snapshots.

That does not mean every discretionary purchase is fatal. It means the lender wants a believable picture of what is fixed, what is flexible and what the household can still afford after a stressed mortgage repayment is layered on top. The more clearly we present that picture, the easier it is for the assessor to see that the loan is affordable without relying on optimistic assumptions. In a competitive market, Empower Money can help borrowers organise a clearer living expenses home loan application before it reaches formal assessment.

FAQs

Do lenders use my actual spending or a benchmark?

Usually both. Lenders look at declared expenses, but APRA expects them to use the greater of declared living expenses or an appropriately scaled benchmark such as HEM.

Why do unused credit cards affect borrowing power?

Because lenders assess the limit as available debt capacity, not just the balance. Westpac says card limits count as debt, and APRA gives a prudential example of assessing revolving debt at 3 per cent a month on the committed limit.

Are rent and mortgage repayments part of HEM?

No. The Melbourne Institute says HEM is a net of housing costs measure, so rent and mortgage repayments are excluded and need to be assessed separately.

Will lenders look at child care and private school fees?

Yes. Major lender checklists and templates include child care, education and related dependent costs because they are ongoing expenses that reduce surplus income.

Can understating my expenses help me get approved?

Not reliably. If your number is below the lender’s benchmark or does not match your statements, the lender may substitute a higher figure or ask for more evidence.