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A new baby completely changes your life. Are you also prepared for how a new baby might affect your chances of buying a home? Here are some things to consider before you submit your application.

When a lender assesses your home loan application, they look at your income, assets, debts and expenses before deciding whether they think you can make the repayments. Those figures are likely to change when you have your first child. That means your eligibility for a home loan could also change.

Changes to your income

A lender needs to know that your income will cover your mortgage repayments, even while someone’s taking time off work to be a new mum or dad.

If you’re the primary carer and you plan to leave employment temporarily or indefinitely, the loss of your income will affect your household income. When you’re applying for a loan and planning to take an employment break, you may need a letter from your employer confirming your return-to-work income.

Both parents may be eligible for parental leave. In many cases the parental leave pay will be lower than your regular income. To get an idea of what your new income will be, figure out how much parental leave you plan to take. Also speak to your employer to find out whether they offer any additional entitlements. A financial planner will be able to discuss your personal situation, including any tax benefits you might qualify for.

Cost of raising a child

When you calculate your expenses, you’ll need to factor in the cost of raising your child. As a guide, a University of Canberra study estimated that low income ($1,160/week) families spend on average 7.4% of their earnings to raise a child aged 0–4, whereas high income ($4,984/week) families on average spend 4.6%.

Whatever your income, when you have a child your ongoing expenses will go up. This means you’ll have less money to make home loan repayments, so the amount you’ll be able to borrow may be less.

Cost of the loan

Before deciding on a home loan product, research the likely cost of the loan and the size of the repayments. Many lenders, brokers and real estate websites have free tools and calculators.

The following items will affect your repayments:

 - The amount you borrow.

 - The length of the loan; the average home loan is 25–30 years.

 - The interest rate.

 - Whether the interest rate is fixed, variable or combined.

 - Your financial commitments

A mortgage is a financial commitment – and so is a baby. When you’re preparing to take on both at the same time, it’s a good idea to look at the whole picture.

First, assess your current financial situation by pulling together information about your income and expenses, including any existing loans. What repayments can you afford?

Then, using this information, adjust the amounts to reflect your income and expenses after having your child. What does that do to your home loan repayments?

Although raising a child will be an added expense, you may find that you can reduce your discretionary costs – such as dinners and holidays.  Depending on how much you can reduce, this may even give you about the same financial capacity. Or perhaps you can still afford to service a mortgage but may not be able to borrow as much as you first thought.

You’ll need to decide whether a mortgage is a worthwhile debt, given that your household income and expenses will change when your baby comes along.

Do you want to start a family now, or do you want to build a nest? An informed decision might make both possible if you understand the financial changes a child will bring. 

Happy reading - and feel free to share with anyone who may find this info useful.

Jamie

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If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. 


 

The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.

 

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If you’re reading this and about to go on maternity leave (or are already on it) – congrats! It’s an exciting time.

We get quite a lot of new enquiries from clients who have just been declined from their current lender due to being on maternity leave.

It’s a frustrating situation – some have been saving up a deposit for a long time and are excited about finally purchasing a home. Others have decided it’s time to upgrade into something larger to accommodate the growing family – or simply want to release some equity to pay for renovations.

From the lenders perspective, some will argue that there’s no guarantee the client will return to the workforce and therefore the application is considered high risk.

The good news is that some lenders are more receptive to lending to clients on maternity leave. They won’t simply base their assessment on your current financial situation (which usually involves a period of reduced household income) but will also look at your borrowing capacity based on your return to work income.

Providing you have enough savings (or other liquid assets such as shares) to cover any shortfall in income during the period of maternity leave - some banks will take into account your return to work income when assessing your borrowing capacity.

How long can you be on maternity leave for? From the banks perspective -  it’s generally a maximum period of 12 months but the shorter the period the more favourably the application will be looked at.

What do you need to show the bank? It’s the same requirements as any other application – you need to provide payslips as well as a letter from your employer stating the terms of your maternity leave, your return to work date, tenure when you return (part time or full time) and the salary you will earn. You will also need to show proof of savings/assets.

What’s the maximum Loan to Value Ratio (LVR) you can borrow up to? As a general rule – it’s best to aim to borrow no more than 80% of the property’s value. Technically it’s possible to go beyond 80% (up to 90%) - but when mortgage insurance is involved, it adds a further layer of scrutiny to the application.

Does the purchase have to be for an owner occupied property or can it be for an investment? It can be for either. We’ve had loans approved for both.

With all that said – it’s hugely important that the borrower is comfortable with taking on additional debt. Whilst the thought of a new home, investment property or upgrading is exciting – overstretching yourself and ending up in financial hardship isn’t! So whilst the bank might be willing to provide you with a loan it’s important that you’ve also crunched the household budget and are reasonably certain that you can afford to take on the additional debt.

When crunching the numbers, it’s important to base your loan repayments on a higher rate (around the 7% mark) so you can be confident that you’ll be able to meet your repayments when rates eventually start heading back up. Also factor in expenses relating to your new bub – they can be very expensive!

All in all, being on maternity leave doesn’t preclude you from borrowing. It’s just a matter of working with a lender that’s policies are conducive to your requirements and presenting the strongest application you can.

If you need assistance with getting a loan approved whilst on maternity leave, feel free to get in touch with us.

Jamie 

About the author: Jamie Moore is an active residential property investor and owner of Pass Go Home Loans. If you’d like to have Jamie provide advice on your finance structure and investment strategy, simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. This information is of a general nature – please always consult taxation professionals about the specific nature of your situation.

Pass Go Home Loans Pty Ltd
Australia Wide Mortgage Broker
This email address is being protected from spambots. You need JavaScript enabled to view it. | www.passgo.com.au | 1300 656 299

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