For many Australians, securing a home loan is a major financial milestone. However, one factor that can significantly influence borrowing capacity is having children. While raising a family is rewarding, it also comes with financial responsibilities that lenders take into account when assessing loan applications. Understanding how children impact your borrowing power can help you plan effectively and make informed financial decisions.
Why Do Kids Affect Borrowing Capacity?
When assessing a home loan application, lenders evaluate your income, expenses, assets, and liabilities to determine how much you can borrow. Children add to household expenses, which increases your financial commitments and can reduce the amount you are eligible to borrow. Lenders apply these considerations under the Household Expenditure Measure (HEM) or detailed living expense assessments to ensure that you can comfortably manage repayments.
Key Ways Children Impact Borrowing Power
- Increased Living Expenses
- Raising children comes with additional costs such as childcare, education, healthcare, clothing, and daily necessities.
- Lenders factor in these ongoing expenses when assessing your ability to service a loan.
- Reduced Disposable Income
- With children, a significant portion of your income is allocated towards their needs, leaving less disposable income available for loan repayments.
- Lower disposable income can result in a reduced borrowing limit.
- Potential Reduction in Household Income
- If one parent takes parental leave or reduces work hours to care for children, household income may decrease temporarily or permanently.
- Lenders may assess your borrowing capacity based on the lower income figure, affecting your loan eligibility.
- Higher Debt-to-Income Ratio (DTI)
- Lenders use the Debt-to-Income ratio to assess financial stability. If family expenses increase due to children, your overall financial position may change, impacting how much you can borrow.
- Impact on Lifestyle and Spending Habits
- Having children often leads to increased spending on essentials and discretionary items such as extracurricular activities, family holidays, and medical expenses.
- Lenders assess whether your spending habits align with responsible borrowing and affordability.
How to Improve Borrowing Capacity as a Parent
- Reduce Unnecessary Expenses – Keeping discretionary spending in check can help improve your financial position and show lenders that you manage money responsibly.
- Increase Savings and Reduce Debts – A higher deposit and lower personal debt levels improve your borrowing potential.
- Improve Household Income – Exploring additional income sources or planning for career progression can enhance your financial strength.
- Seek Professional Advice – Consulting a mortgage broker can help identify the best lenders and loan options suited to your financial situation.
While having children can influence your borrowing capacity in Australia, careful financial planning and strategic decision-making can still help you achieve homeownership goals. Understanding lender criteria and working towards financial stability will put you in a stronger position when applying for a home loan.
If you’re planning to buy a property and want to explore your borrowing capacity, seeking expert advice can make a significant difference in securing the right loan for your family’s needs.