Why does a lender ignore the living expenses I wrote on the form if they are below HEM?

Many lenders treat the Household Expenditure Measure as a floor. If declared expenses sit under that benchmark for your household type, they substitute the benchmark. Declaring a lower figure does not create spare capacity. General information only — this is not an invitation to invent a higher or lower number.

Do credit cards and buy now pay later count if I always pay them off?

They often count as a commitment anyway. Cards are commonly assessed against a percentage of the limit, not the current balance. BNPL is increasingly treated as existing credit, especially where facilities are stacked. Paying on time does not make the limit disappear from a serviceability worksheet.

Is a serviceability decline the same as a responsible-lending decision?

Not always. Responsible lending obligations have been scaled back for many credit products. Banks still run serviceability tests because APRA-era practice and their own credit policy require a buffer. A decline can be risk appetite, not a finding that the contract was unsuitable in the old NCCP sense.

How lenders assess serviceability — Credit Made Simple

Serviceability is a dull word for a sharp question: after this new repayment, does the household still function on the lender’s assumptions. It is not a character reference. It is not a credit score, though the score sits in the same file. It is a worksheet — income, a living-cost floor, existing debts, and a buffer above the actual interest rate — that decides whether the application proceeds.

This publication is not an Australian credit licensee and does not give credit assistance. The following is a description of how that worksheet is commonly built in Australia in the mid-2020s. It is not a method for presenting an application, and it is not a suggestion to take or avoid a particular loan.

Income is the easy column until it is not

PAYG salary with regular overtime that has lasted two years is the version of income credit policy was written around. Everything else is a haircut or a debate. Casual and contract income is often averaged and then discounted. Bonuses may be counted at 50 per cent, or not at all, or only after a history. Family tax benefit, rent, dividends and foreign income each have a rule, and the rule differs by lender.

Self-employed income is a longer argument: tax returns, accountant’s letters, add-backs that one credit team will accept and another will not. Lenders do not take your headline salary at face value. They take a serviceable income, which is a smaller number, and they run the rest of the sheet on that. A guarantor’s income is not the borrower’s income. Mixing those columns is how families walk into a guarantee they have not priced. See secured versus unsecured personal loans.

HEM, declared expenses, and the floor under living costs

Australian home lenders, and many personal-loan teams, do not simply believe the living-expense figure on the application. They hold it against the Household Expenditure Measure (HEM), a Melbourne Institute benchmark that varies with household type and, in the tables lenders buy, with location and income band.

The usual practice, hardened after the Hayne royal commission, is a floor. If you declare living costs below HEM, the lender substitutes HEM. If you declare costs above HEM, a careful lender uses the higher declared figure. The sloppy version of the 2010s — “everyone is on HEM, tick” — is the practice APRA and ASIC spent years criticising. It has not vanished. It is less respectable than it was.

HEM is not your budget. It is a statistical floor designed to stop an application from showing a household that eats $40 a week. It will not save a borrower whose actual rent, childcare and commuting costs sit well above the benchmark. Those costs should appear as declared expenses, or as separate line items that never belonged in HEM. There is no prize for declaring a number just above the floor. Credit policy has moved toward bank-statement and open-banking evidence for a reason: the statements are increasingly the application.

Existing debts, including the ones that look small

Every continuing credit obligation is a claim on the same income. Home loans, personal loans, car loans, novated leases, child support, and rent (if you are not buying the house you live in) are the obvious lines.

Credit cards are assessed more harshly than their current balance suggests. A common method is to apply a monthly commitment equal to a percentage of the limit — often in the vicinity of 3 to 4 per cent — regardless of whether the card is cleared each month. A $15,000 limit with a $200 balance is not a $200 problem on that worksheet. It is a few hundred dollars a month of assumed repayment. That is why people are sometimes told a card limit, not a card balance, is the serviceability issue. It is also why this article will not tell you to close a card. Closing a card is a separate decision with its own credit-file effects; see closing a credit card.

Buy now pay later used to be the line that did not exist. It exists now. Lenders have become less willing to treat Afterpay, Zip, Humm, Klarna and their peers as a shopping habit. Multiple BNPL facilities, even when each instalment is small, look like stacked short-term credit, because that is what they are. The BNPL and credit-file story is about reporting and the reform perimeter. The serviceability story is simpler: if the statements show four BNPL providers, the worksheet has four more claims.

A hypothetical, labelled as such: a household with a modest car loan, two cards near their limits, and three BNPL accounts can have “spare” income on a kitchen-table budget and none on a bank’s sheet. The kitchen-table budget counts what left the account last Tuesday. The bank’s sheet counts limits and buffers.

The credit file is a second assessment, not a substitute

Equifax, Experian and illion do not share one score. They share a reporting system. Lenders pull one or more files and read inquiries, open accounts, repayment history information under comprehensive credit reporting, defaults, and court judgments. A high score with a recent default is not a high score for the purpose of this worksheet. A thin file is a different problem again; see building credit from scratch.

Serviceability and the file can disagree. A borrower can afford the repayment on the numbers and still be declined because the file shows too many recent inquiries, or a default that is still in its reporting life. A borrower can have a clean file and fail serviceability because HEM plus the card-limit method plus a 2.5 percentage-point buffer leaves no surplus. Treating the score as the decision is a category error. Read how Australian credit scores work and how to read your credit report as a parallel system, not as a spare key to this one.

Wrong information on the file is worth correcting through the bureau, the lender, the OAIC and, if needed, AFCA. It is not worth inventing a story for the application. See fixing errors on your credit file.

Buffers and floors after APRA-era practice

For home loans originated by authorised deposit-taking institutions, the serviceability buffer is the part of the sheet that most people meet as a surprise. APRA does not tell a bank whether to approve your loan. It tells ADIs, through prudential guidance, to assess repayments at a rate materially above the actual rate. The buffer has moved. It sat at 2.5 percentage points for years, was lifted to 3.0 in 2021 as prices ran, and was returned to 2.5 percentage points in 2022. The 2.5 point setting is the one that has remained the APRA benchmark into 2026. A 6.2 per cent loan is therefore assessed, at many banks, as if it were 8.7 per cent.

Some lenders also apply a floor: they will not assess below a minimum rate even if the actual rate plus the buffer is lower. The old APRA 7 per cent floor was removed in 2019. Internal floors did not all leave with it. Non-ADI lenders are not bound by APRA in the same way. Many copy the buffer anyway, because their warehouse funders and credit committees live in the same climate.

This is lender risk practice, not a consumer-protection gift. It exists so that a household that can just meet today’s repayment is not one cash-rate move from default. It also means “I can afford the advertised repayment” is not the test the bank is running. The test is whether you can afford a higher repayment that may never be charged.

Personal loans and car loans use a thinner version of the same idea: a surplus after declared or HEM living costs and existing debts, sometimes with a smaller shock to the new rate. They still see the card limits. They still see the credit file.

What still applies after responsible lending was scaled back

The 2020s reforms reduced responsible lending obligations for many credit products, particularly those written by ADIs that already sit under APRA. That change is real. It is also incomplete. Some products still carry stronger NCCP duties. Small amount credit contracts still have their own rules. BNPL is being brought into the credit regime on a staged design. Brokers and other intermediaries who suggest or arrange a particular contract are still in the credit-assistance regime if they do that work.

For the borrower, the practical result is uneven. A decline from a bank may now be “credit policy” rather than “we have determined this contract is unsuitable”. The worksheet still looks like a responsible-lending worksheet, because surplus, HEM and buffers are how you avoid writing loans that default. The legal label has shifted more than the arithmetic. See responsible lending: what still applies.

Hardship is a different door. A loan that was serviceable on day one can become unpayable. The National Credit Code still has a hardship-variation path for consumer credit. That path is not a second serviceability assessment: when you cannot pay a loan.

What this is not

It is not a list of documents to withhold, and not a suggestion to move spending off a statement or to park BNPL with a relative. Those moves turn an assessment into a dispute, and sometimes into a fraud problem. It is not a recommendation to consolidate debts so the worksheet looks cleaner; that is a different article, debt consolidation in Australia.

Lenders assess serviceability because they lose money if the surplus was imaginary. You assess whether the surplus on your actual expenses is imaginary. Those two assessments can both be sincere and still disagree. ASIC’s Moneysmart budget tools are the public version of the second assessment. The National Debt Helpline on 1800 007 007 is the free version if the surplus has already gone. This site will not run either worksheet for you.