First up, let's be clear, having kids is a gift but the cost of raising them can be a huge expense, especially when it coincides with buying your own home or investment property.
There's no denying having children comes with its own set of financial responsibilities and this is where it's easy to forget that children (or dependents) affect your borrowing power.
While you might have been quoted a maximum borrowing capacity of $800,000 when you didn't have kids, it may be a shock to discover the figure can be considerably lower when you throw a child, or children, into the mix.
But don't let this discourage you from being a homeowner.
It's useful to know in advance how kids can affect your finances, including what home lenders may be willing to lend you. Safe to say, their calculations will be adjusted when there are children to consider.
How is your borrowing power typically calculated?
Borrowing power refers to the estimated maximum amount that you may be able to borrow for a home loan, calculated generally as your net (or after tax) income minus all your living expenses.
loans.com.au managing director Marie Mortimer told Savings.com.au that these expenses include daily living costs and regular financial commitments such as bills, groceries, other loan repayments, healthcare, and other costs. The number of dependents you have is also taken into consideration.
"A responsible lender will only lend you an amount that you can reasonably repay without undue hardship, even if interest rates go up," Ms Mortimer said.
"That is to protect the interests of the borrower as much as the lender.
"To calculate the amount you can borrow, lenders will look at your income minus your financial commitments and other living expenses, including those related to children.
"Each lender has their own assessment rate so the amount they will lend you can vary considerably. It's a good idea to shop around and take advantage of their online calculators to get a general idea of what they might lend you."
See also: What is home loan serviceability and how is it calculated?
See also: What is the Household Expenditure Measure?
Keep in mind, lenders will also add a safety net - called the serviceability buffer - to your estimated interest rate when calculating your borrowing power. This is to ensure you will be able to handle any possible future interest rate increases as well as any unforeseen changes in income or living expenses.
How do dependents impact your borrowing power?
Unfortunately, kids don't come cheap. Having others to support inevitably adds to your living costs, an important part of any home loan assessment.
Ms Mortimer said dependents can impact your financial situation and borrowing power in many different ways.
"Having children is a blessing but as every parent can tell you, they cost a lot to raise," she said.
"Food, clothes, groceries, doctors and dentists, education, kids' entertainment, just about everything goes up and that will really eat into your disposable income for repaying a loan.
"So, lenders need to reflect that when assessing your borrowing power."
To get an idea of how this can play out in dollar terms, let's consider Couple A and Couple B.
Couple A
Paul and Sarah make $73,000 each per year (median Australian employee income, according to the ABS). They have no kids and no other outstanding loans.
According to median cost-of-living estimates, they spend about $4,000 a month as a couple to live. (Note: cost-of-living estimates in Australia vary greatly according to location, lifestyle preferences, and household size.)
Based on Savings.com.au's borrowing calculator, that puts their borrowing capacity for a 5.50% p.a. 30-year home loan at $831, 741.
Couple B
Tom and Kate have the same income as couple A and also have no outstanding loans, but they do have two children.
Their monthly living expenses are $5,000 a month - about the mid-range of estimated cost-of-living expense for an Australian family of four.
Based on Savings.com.au's borrowing calculator, that puts their average borrowing capacity for the same loan at $687,724. That's more than a $140,000 decrease.
How having children can affect your home loan application
It's not just borrowing power that can be affected by children. Parents or soon-to-be-parents may have to go through a few more hoops on their home loan applications.
But let's start with the good news. When it comes to your income, lenders will generally include child support or government assistance as part of it which can help borrowing power (see more on this below).
If you're already on parental leave or soon to take it up, your lender may ask for additional information. This may include a letter from your employer confirming your intended return to work date and salary. Many lenders will also take into consideration whether you intend to return to work full time or not so be prepared that they may ask the question.
See also: Can you qualify for a home loan while on parental leave?
Some of the major lenders, such as Westpac and NAB, state they will take into account your parental leave payments and your expected salary when you return to work in assessing your application. If you're currently on parental leave and applying for a home loan, it can pay to research lenders' individual policies on how they assess applicants on parental leave.
For those with existing home loans, the major lenders state they will also make provisions for borrowers whose income has been reduced owing to being on parental leave. These can include allowing for lower home loan repayments during the leave period or even repayment holidays in some cases. Again, it's wise to check the parental leave policies of your lender beforehand so you know where you stand.
How to increase borrowing power if you have kids
Having kids automatically comes with unavoidable expenses that those without children don't shoulder. But that doesn't mean there are not ways to boost your borrowing power.
Here are some measures that can help increase your disposable income, a key factor in determining how much lenders will allow you to borrow.
1. Decrease liabilities and expenses
One of the most effective ways to increase your borrowing power is to get rid of any existing debts or credit facilities.
Eliminate your credit cards, pay down and close out any personal loans, and limit non-essential spending. It's wise to prioritise paying off high-interest rate debt first and go from there.
A $5,000 credit card limit, for example, can reduce your borrowing power more than you think, even if your balance is zero.
See also: Will credit card debt affect my mortgage application?
Many lenders will factor in your entire credit card limit rather than your outstanding credit card balance. This is because your lender needs to account for the fact you might spend the whole amount. So, even though you may only have $500 on your credit card, well under your $5,000 limit, your borrowing power will take the full hit.
Also look at your Buy Now, Pay Later (BNPL) habits. While such products can reduce spending large amounts at once, they can also damage your credit score if you fail to make repayments on time. Be judicious in using them.
See also: Credit Score Calculator
2. Save a larger deposit
This is a clear-cut case of the bigger, the better.
While this approach is not the easiest, or the quickest, saving more money for a house deposit is attractive to a lender as it shows you have the ability to save consistently. This, in turn, signals you're likely to be a good bet to make regular mortgage repayments.
A larger deposit also means needing a smaller home loan, thus reducing your repayments and the total interest paid.
See also: Home Loan Deposit Calculator
3. Lower your living expenses
If you've got home ownership in your sights, it is an opportune time to spring clean your budget.
While this may seem like painful task, it could identify areas where you could easily cut back.
Check what subscriptions you have (and the ones you've forgotten about) and whether you can do without them. While you're at it, look at:
gym memberships
food delivery services (try deleting the apps from your phone)
reviewing insurance policies for better deals
catching public transport instead of driving
entertainment expenses
4. Take advantage of government benefits
To increase your borrowing power with kids, make sure you're receiving any government benefits designed to support families with children. It pays to check your eligibility for the following:
As we've covered, government assistance will generally be taken into account in a lender's income assessments which, in turn, can play their part in boosting your borrowing power.
5. Negotiate a pay rise or start a side hustle
It's not always easy but increasing the amount you take home in your pocket through a pay rise can be the quickest way to lift your borrowing power. Alternatively, you could start a side hustle outside of business hours to earn that extra bit of cash.
Consider renting out a spare room, becoming a part-time ride share driver, mowing lawns, selling possessions, hiring out your vehicle, or starting up an online business. The more money coming into your bank account means more disposable income.
Refinancing your home loan after having children
If you're in the position of having a home loan in place before having children and are finding it difficult to meet your repayments now that you've started a family, don't despair.
Speak to your lender about what options are open to you to ease the burden. It may just be to cover the time that one parent is unable to return to full time work while they are caring for young children. Some families may also decide that two parents working full time with children in full-time childcare is not for them.
In any case, your first step should be to approach your lender if you're concerned how you'll cope with your repayments given your new situation. They are obliged to assist you to get through any financially challenging periods.
If you decide to refinance your home loan, having dependents will have some effect on your application but it doesn't mean it won't be successful. Be assured there will be many options open to you on the home loan market.
The home loans below feature some of the lowest interest rates on the market:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 5.98% p.a. | $2,978 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.89% p.a. | 5.80% p.a. | $2,962 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
5.99% p.a. | 6.02% p.a. | $2,995 | Principal & Interest | Fixed | $0 | $0 | 60% |
| Promoted | Disclosure | ||||||||||
5.93% p.a. | 5.93% p.a. | $2,975 | Principal & Interest | Variable | $0 | $395 | 70% | Disclosure |
Savings.com.au's two cents
Having kids doesn't mean your dream of buying a home has to go out the window.
Becoming a parent is a significant life event - it's physically, emotionally, and yes, financially intense. To maximise your borrowing power, it's best to strengthen your borrowing credentials as much as possible before applying for a home loan.
If you've got a hefty lump sum to put down as a deposit, minimal debt, and enough income to show you can comfortably afford mortgage repayments, you're in a good position to secure a home loan.
If you're planning on having your first child in the near future, it may pay to get yourself settled into paying a home loan first and making your own provisions for how a child, or children, may affect your finances. But life doesn't always go to plan.
There's no getting around the fact your borrowing power will be reduced to some extent when you add children in the financial mix, but it certainly doesn't have to be a stumbling block to getting a home loan.