Home loan question: Do children lower your borrowing power?

When a lender looks at your home loan application, one of the main things they look at is your borrowing power. 

Of course, borrowing power changes from applicant to applicant and is based on numerous factors such as salary, debt, living expenses, and credit history (just to name a few). 

However, it’s easy to forget that having children (or dependents) affects your borrowing power, too. Let’s consider this here.

How do children affect your home application?

While having children is a gift and fulfilling for many, lenders can see it as an increase in living expenses. Raising kids costs time and money, and lenders consider this extra cost when evaluating your financial capacity to make mortgage repayments. 

According to the Australian Institute of Family Studies, “the estimated weekly costs for low-paid families of raising two children – a 6-year-old girl and a 10-year-old boy – is $340 per week or $170 a week per child.” 

Which is about $17,680 for two children or $8,840 for one child each year. 

That extra expense means you have less disposable income that could go towards paying back your home loan.

Let’s look at an example: Patrick and Jeremy have a combined income of $120,000 with $30,000 in annual living expenses. They also have no children. Based on Mozo's borrowing calculator, that puts their average borrowing capacity at about $710,000.

However, having two kids (or two dependents) would increase their annual expenses to about $47,000, bringing their borrowing power down to $528,408. Almost a $200,000 decrease! 

Typically to avoid this, many Aussie couples think ahead and purchase property in preparation for starting a family. But it is easy to forget that if they want to refinance their loan in the future, which is common, lenders will take into consideration the new dependents.

Refinancing after having children

Currently, 75% of Australian homeowners are on the brink of becoming home loan hostages, so they can’t easily refinance their home loans to escape higher interest rates. 

And as mentioned earlier, having children is a significant expense that lenders consider when evaluating refinancing applications. 

However, having kids doesn’t mean you’ll never be able to refinance. Financial situations change over time and it’s perfectly normal. But if you want to switch lenders and you have a child, you’ll have to change your game plan to increase your borrowing power.

How to increase my borrowing power if I have kids?

When looking at home loan applications, lenders want to know that you have enough disposable income to pay your loan on time without any issues. This includes being able to make your repayments if interest rates increase.

Below are four tips on how to increase your borrowing power.

1. Have a larger deposit. Saving for a larger deposit means having more equity and needing a smaller home loan.
   
2. Pay off any debts. Consider paying off any credit card or personal loan debts. This might help increase your borrowing power.
   
3. Negotiate a pay rise. One of the easiest ways to increase your borrowing power is by having a pay rise. More money coming into your bank account means more disposable income (which lenders love). 
   
4. Lower living expenses. Audit your living expenses and identify areas where you could cut back—got any memberships you don’t use? Streaming services you never watch? Maybe cut back on your takeaway orders. Small changes here and there could genuinely enhance your savings in the long term.

Don’t feel discouraged from becoming a property owner if you’re thinking of having kids. But it’s something to keep in mind and plan properly for.

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