How having children reduces your borrowing capacity

Having kids is almost never a financial decision, and let’s face it, babies are the best marketing tool ever! Their little chubby faces, cute gurgling noises and all those miniature socks – who could resist? And as you turn to your loved one and say… “let’s have a baby”, endorphins are released and your heart overrides your head (and your wallet).

Most parents have read articles about the costs of raising kids, and for those who haven’t, a typical middle-income family the costs are around $406,022 per child over a period of 18 years. Yes, that’s almost half a million for one human being. And who said you couldn’t put a price on love?

So, what happens if you have more than one child? $406,022 + $406,022 = $812,044 But surely, you’ll get a discount right… ‘buy one, get one half price’. Well, you’ll probably save some money on clothes and toys, but essentially, they are all consuming human beings, and the banks know it.

Banks have their own formula for calculating your living expenses

Having another mouth to feed obviously adds costs to your living costs, and part of a mortgage assessment is your ability to repay your home loan, which is why lenders consider all your living expenses as part of your application.

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Essentially borrowers without children have much lower living costs than a family with children so lenders will ask how many dependents (children under 18 years old) the borrower/s has. Lenders then apply additional costs to your living expenses via their set formula, regardless of whether they are higher or lower than your actual expenses as they will adopt the higher figure.

One major bank calculates living expenses for a family who has three children and the first adult earns $90,000 per annum, at $3,230 per month ($38,760 per annum). And a borrower on the same income with no children, has their living expenses calculated at $2,368 per month ($28,416 per annum) – that’s a big difference.

Whereas a well-known second tier lender adds $2,429 to your annual living expenses for the first child and $3,438 for each subsequent child.

Standard living expenses           $20,720
First child living expenses          $2,429
Second child living expenses     $3,438
Third child living expenses         $3,438
Total living expenses                 $30,025

You can see that there are many ways living expenses can be calculated, both between lenders and between borrowers with and without children. Mortgage Broker Mint Equity knows which lenders have the most favourable living expense formulas and can assist you with finding the best home loan.

If you’re planning on having children or another bundle of joy, it’s best to get your property finances in place before the big arrival.

How children affect your borrowing capacity

Once the living expenses have been calculated and the number of dependants, a borrowing capacity will take into account the uncommitted monthly income (that hasn’t been allocated to living expenses), the term of the home loan, expenses and the loan purpose.

For example, a couple with no children on exactly the same income as a couple with three children, can borrow almost $126,000 more. That means the people with no children can buy a property for around $990,000, whereas the family with three children could only buy a property worth $850,000 – assuming they both have the same 10% deposit.

Of course, the more children you have, the more your living expenses go up and the less you can borrow.

Planning and timing is key to success

Whilst sometimes babies are an unexpected surprise, if you’re planning on having your first child or another bundle of joy, it’s best to get your property finances in place before the big arrival. You should also prepare two budgets so you’ll know how your mortgage and living expenses are impacted before and after expanding your family. Also take into consideration if your income will take a hit during the maternity leave period.

P.S – Banks never ask how many dogs or cats you have, so feel free to have a menagerie! 

Planning is the key to better finance decisions, so even if you’re just playing around with ideas for future plans, give Mint Equity a call on 02 4340 4847 and we can help make the decision process easier.