Press releases
Impact of children on borrowing capacity
14/12/2011
Families looking to borrow, trade-up or invest in property in the New Year, are advised to shop around, with lenders’ assessments of living expenses for those with children varying considerably from lender to lender.
According to Smartline Personal Mortgage Advisers Executive Director Joe Sirianni, living expenses was one factor that would increase with the number of children under 18 in your care and would, in turn, affect borrowing capacity.
“All lenders have a table they use as a guide to assess a borrower’s living expenses,” Mr Sirianni explains. “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.
“That’s a difference of around $100,000. If there are other factors that add to the complexity of the lending scenario, such as a personal loan, Family Tax Benefit payments and child maintenance payments, borrowing capacity will vary significantly.”
Mr Sirianni said lenders’ assessments of a borrower’s living expenses varied substantially across the board and was constantly in a state of flux.
“For example, a couple with three dependent children and absolutely 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.”
For a couple with children just starting out on the property ladder, Mr Sirianni says there were a number of considerations borrowers might not take into account.
“For example, lenders can’t use Family Tax Benefit income in their assessment if it’s paid annually as a lump sum payment,” he said.
“So, for those with children wanting to boost their borrowing capacity, simply switching to fortnightly payments, and being able to produce documentation from Centrelink as evidence, can go a long way to support their application.
“Also, lenders’ standard living expenses tables don’t cover private school fees, which add a significant load to a family’s living expenses and, in turn, affect borrowing capacity.”
While not a consideration for all families, Mr Sirianni said that paying child maintenance had a significant impact on lenders’ assessments.
“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,” he said.
“The bank accounts – or evidence – form an integral part of lenders’ assessments of your income.
“If you receive cash payments or regular assistance with bills, as opposed to regular direct credit payments, this is not sufficient from the lender’s perspective. It must be clearly documented and as ‘regular as clockwork’.”
Mr Sirianni advised borrowers to have their paperwork organised, keep personal debt to a minimum and seek the advice and guidance of a mortgage adviser.
“As well as having a thorough understanding of lenders’ policies, your adviser will be able to give you an indication of your borrowing capacity and what you can do to increase that figure,” he said.
“Each individual borrower and their personal circumstances are unique. Rather than compare yourself with your neighbours and friends, work with a mortgage adviser to understand how lenders view and assess your unique personal situation.”
As always, talk to your Smartline Personal Mortgage Adviser for more information.
Smartline Home Loans Pty Ltd and their representative have made every effort to ensure that the information is free from error, neither Smartline nor its representative makes any representation or warranty as to the completeness or accuracy. Readers must decide if this information is suitable for their personal situation or seek advice.
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