Children’s effect on borrowing capacity

Families looking to borrow, trade-up or invest in property have much to gain from seeing their Mortgage Choice broker, with the assessment of living expenses for those with children varying considerably from lender to lender.

Living expenses are assessed as increasing with the more children you have under 18 and will, in turn, affect how much you can borrow.

Assessment of borrowing capacity
All lenders have a formula they use to assess a borrower’s living expenses. For example, one lender allows $1105 per month for a single applicant, $2032 for a couple, an extra $299 for one child and another $598 for the second child – that’s roughly $300 per dependent child and equivalent to holding a credit card with a $10,000 limit.

Looking at a basic example of a couple with a combined income of around $95,000 a year, no debt other than a limit of $5000 on their credit card, they could borrow a maximum of around $450,000 if they have two children, versus $550,000 with no dependent children.

If there are other factors that add to the complexity of the scenario, such as a personal loan, Family Tax Benefit payments and child maintenance payments, borrowing capacity will vary quite a bit.

The difference between lenders
Lenders’ assessments of a borrower’s living expenses vary considerably, and are constantly changing.

For example, a couple with three dependent children and no debt could be assessed as having additional children’s living expenses of as much as $1375 a month with one lender and as little as $900 a month with another.

Equally, a couple with two children can have their living expenses assessment vary from as much as an additional $933 to as little as $598.

Considerations for first home buyers
For a couple with children just starting out on the property ladder, there are a number of things to take into account.

For example, some lenders won’t consider Family Tax Benefit income in their assessment if it’s paid annually as a lump sum payment. 

So, for those with children wanting to boost how much they can borrow, simply switching to fortnightly payments, and being able to produce documentation from Centrelink as evidence, can go a long way to support your application.

Also, lenders’ standard living expenses formulas don’t cover private school fees, which add a significant load to a family’s living expenses and, in turn, affect how much you can borrow.

And, while not a consideration for all families, paying child maintenance impacts on lenders’ assessments of your home loan application.

If you receive maintenance payments, you must have a child support assessment notice and be able to demonstrate, with supporting documentation, regular direct credits to a bank account over at least a six-month period.

Advice and organisation can be invaluable
As well as having a thorough understanding of lenders’ policies, your mortgage broker will be able to compare home loans and give you an idea of how much you can borrow – and what you can potentially do to increase that figure.