How do your kids impact your borrowing capacity?
In the name of responsible lending, banks will only approve a loan to those consumers who they believe will be able to pay it back without significant hardship. That’s straightforward enough, but what effect do your kids have on the lender’s final decision?
An assessment of your living expenses will vary from bank to bank, but living expenses are generally assumed to increase with each dependent child you have.
This means that, generally speaking, the more kids you have, the bigger impact it will have when banks determine how much you’re entitled to borrow. This is the case whether you’re borrowing to buy your own home or an investment property.
When it comes to kids and your mortgage application, there is a range of influencing factors to consider.
Living expenses count!
In addition to looking at the flow of cash coming in, banks will examine your living expenses to help them determine whether you are eligible for a loan, and at what value. This includes taking into account any children you have, because as any parent knows, they tend to be one of the most expensive decisions you’ll ever make!
All lenders will use a different formula to estimate your outflow. Generally your borrowing capacity is affected by Family Tax Benefit payments, child maintenance payments and personal loans, in addition to expenses involved in raising kids.
According to InfoChoice, a couple earning $70,000 each before tax with no kids and a $5,000 credit card limit has a borrowing power of just over $1 million (mortgage at five per cent over 30 years).
With one child, that borrowing power drops to $960,000. With two children, it falls to $885,000 and with three kids, it sinks to $807,000.
Maternity leave and babies
While some banks are flexible, it’s common knowledge in the lending industry that new mums can have a hard time getting a loan approved. This is because unfortunately, most lenders view unpaid maternity leave as an equivalent to unemployment, although this view is slowly changing. For example, one of the majors now accepts a “return to work” letter from the employer as sufficient to include a person’s income whilst on maternity leave.
Though it is still possible to have a mortgage application approved when on maternity leave, women with paid maternity leave or whose partners earn an income sufficient enough to repay the loan are generally favoured.
If you’re on unpaid maternity leave, the bank may take into account what funds you have set aside and the length of time before you return to work before deciding whether you qualify. Policies vary between banks and it’s worth discussing your situation with your broker to ensure you apply with a lender that suits your situation.
If you are pregnant or have kids, what should you do next?
Before applying for a home loan, there are a few things to consider.
It is possible to reduce or even pause your home loan payments on your own home while you’re on maternity leave. There are specific requirements that you must meet to be eligible for this benefit, but it is worth discussing with your lender or mortgage broker.
Also, ensure that you take interest rates into account when planning ahead. Although the cost of borrowing money is currently extremely low, there’s no guarantee that interest rates won’t fluctuate in the future. Consider a higher rate and factor it in to your financial plan when you’re thinking about how many children you may have and what your income situation will be in the future.
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