Some of the most exciting times can come in quick succession of one another: marriage, buying a house and starting a family. If you want to purchase a property after you’ve had kids, you may wonder whether having dependents impacts your borrowing capacity.
This is a common query, especially amongst property investors. In this article, we discuss whether your borrowing power is impacted by having kids.
How is borrowing power calculated?
Your ‘borrowing capacity’ or ‘borrowing power’ refers to the maximum amount of money you can borrow based on your personal and financial circumstances. Financiers use a range of influencing factors to determine your borrowing power, including:
- Your annual income.
- How much debt you already have with open credit accounts (and your available credit limits). This includes personal loans, credit cards, or a car loan.
- Your expenses.
- What assets are in your name, including property or a savings account.
- The lender’s specific credit assessment criteria.
- And other financial commitments (such as having children).
So to answer the question about whether having children impacts your borrowing power, the answer is yes. However, this doesn’t mean that having children or other financial dependents rules you out of buying a home or getting into an investment property. Understanding your borrowing power and what influences your capacity to borrow money may help you put practices in place to help improve or solidify your borrowing power.
Good to know: Due to the specialised nature of NDIS housing and the variations in valuation, typical home loan calculators will not give an accurate indication of borrowing power.
Why does having financial dependents affect my borrowing capacity?
There are several reasons why children and other financial dependents affect your borrowing power. Here are some of them:
Having children comes with significant additional expenses, including education, healthcare, clothing, food, etc. Lenders consider these ongoing costs when assessing your ability to repay loans.
Reduced disposable income to put towards your home loan
With more financial responsibilities due to raising children, your disposable income (which is your income after deducting essential expenses) may decrease. Lenders typically look at your disposable income to gauge your repayment capacity.
Higher debt-to-income ratio
Lenders consider your debt-to-income ratio, which is the percentage of your monthly income that goes toward paying debts. With increased expenses from having kids, this ratio might become less favourable, making it harder to qualify for new loans.
Impact on savings
Having children often redirects a portion of your income towards savings for future needs, such as education and emergencies. A reduced savings capacity may affect your financial stability and ability to make principal and interest repayments in the eyes of lenders.
Some individuals may make career changes or reduce work hours to accommodate childcare responsibilities. Such changes can impact your income and future earning potential, which lenders may consider when evaluating your borrowing capacity.
Credit history and score
The financial strain of raising children could potentially impact your ability to make timely payments on existing debts, which in turn can affect your credit score. A lower credit score might lead to higher interest rates or denial of credit for your required loan term.
Maternity or paternity leave
If you take time off work for maternity or paternity leave, your income may be temporarily reduced. Lenders might take this into account when assessing your ability to make home loan repayments during this period.
Will a reduced borrowing power mean I pay lenders mortgage insurance?
In many cases, a reduced borrowing capacity may lead to the requirement of paying Lenders Mortgage Insurance (LMI) when taking out a mortgage or home loan. LMI is a type of insurance that protects the lender in case the borrower defaults on the loan. It is typically required when the borrower’s loan-to-value ratio (LVR) is high, which means they are borrowing a larger percentage of the property’s value.
The loan-to-value ratio is calculated by dividing the loan amount by the appraised value of the property. For example, if you’re borrowing $400,000 for a home appraised at $500,000, your LVR would be 80% ($400,000 / $500,000).
Lenders often require LMI when the LVR exceeds a certain threshold, which is typically around 80%. If your borrowing capacity is reduced and you need to borrow a higher percentage of the property’s value, your LVR may increase, triggering the requirement for LMI.
LMI is an additional cost that the borrower has to pay, and it can be a significant expense. Considering this cost when determining your borrowing capacity and exploring mortgage options is important. Remember that the specific policies regarding LMI and borrowing capacity can vary between lenders and regions, so it’s advisable to consult with a mortgage broker or lender to get accurate information based on your personal financial circumstances.
Using borrowing power to invest in a second property
If you already own one property and are looking to purchase an investment property, your borrowing power may be positively influenced by the property value of your existing home. This is why it’s so crucial to look at your complete financial position when assessing your capacity to take on investment loans. The equity that you hold in your existing property may mean that you can use your home as a security property for an investment home. The rental income expected from the investment property may also work in your favour when sourcing finance for an investment property. It’s important to seek professional advice before implementing any form of financial strategy that could seriously impact your financial situation.
Calculating your borrowing power for an NDIS investment property
A standard borrowing power calculator may not cut it when it comes to assessing your position to borrow for an NDIS investment property due to their specialised nature. Specialised investment properties need specialist help, which is why NDIS Loan Experts are here to help.
Investment property loans for NDIS properties are what we do best — contact the team to start your SDA home-buying journey today.