Kids can really reduce your borrowing power, research has revealed.
Aussies planning to buy a home, and also to start a family, may have to choose one over the other, at least to begin with, according to new research.
The survey by money.com.au revealed 30 per cent of would-be homebuyers were worried about applying for a mortgage if they were to have kids first.
Of these, 22 per cent worried about what kids would do to their ability to make loan repayments, while 8 per cent were concerned children would affect their borrowing capacity, or even their chances of being approved.
And their concern is warranted because lenders do consider children or other dependants during the mortgage application process.
The cost of caring for them is treated as an ongoing financial commitment when determining how much you can borrow.
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Money.com.au crunched the numbers in order to put an actual figure on how much your borrowing power might be reduced.
For a couple with a combined annual income of $180,000 and borrowing around $800,000 (assuming a 5 per cent deposit and no LMI), adding children can make a significant difference to how much they can borrow, even if they have no other debts.
This family have somehow managed a child and a property. Picture: Getty Images
Based on standard lender serviceability calculations, one child could reduce their borrowing capacity by around $30,000 –$55,000, while two children could cut it by as much as $90,000 –$125,000.
Little wonder that the younger generations were worried about starting a family, without getting stable housing in place first.
The research found that Gen Z were more likely than millennials to feel anxious about how starting a family could affect their borrowing power, mortgage application, or loan repayments. Three in five Gen Zs (60 per cent) said they felt this way, compared with 51 per cent of millennials.
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The survey reflected a change in affordability, said Money.com.au’s mortgage expert Debbie Hays.
“It’s very different to our parents’ or grandparents’ generations, when people tended to start families first and buy a home later. Today, housing affordability pressures are flipping that timeline,” Ms Hays said.
Money.com.au mortgage expert Debbie Hays.
“There’s a real push-and-pull between family planning and buying a home, particularly among first-home buyers. We’re seeing more couples time their mortgage application around when they’re planning to start a family. In some cases, they delay having children once they find out how much dependants can reduce their borrowing power. They don’t want to risk being locked out of the market once kids are in the picture.”
Each extra child will further affect borrowing power, Ms Hays added.
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“Having children reduces your borrowing capacity because they increase household expenses and leave less disposable income available for mortgage repayments,” she said. “When lenders assess your application, they use the Household Expenditure Measure (HEM) to estimate your living costs, including childcare, education, food and clothing. The more dependants you have, the higher your assessed expenses, which ultimately reduces your borrowing capacity and total loan amount available.”
Meanwhile, 45 per cent of Australians surveyed said having children wouldn’t influence how they feel about applying for a home loan, while 26 per cent said they don’t have or don’t plan to have children.
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