With more people prioritising study and travel in their twenties, the decision to start a family and enter the property market often come around at the same time. But, when you factor kids into a loan application, it can dramatically reduce your borrowing capacity.
While there’s no denying that buying a property when pregnant can be a challenge, with careful planning and preparation, it is possible to do both.
The first step is to look at it from the bank’s perspective.
When assessing any mortgage application, the bank’s priority is to determine whether the loan will be able to be repaid (also known as “responsible lending”). This involves evaluating the loan applicant’s income, assets and expenses.
From a parent’s perspective, children are an asset. Yet in the bank’s eyes, they are simply an expense. And a big expense at that! Throw in a period of limited income while one or both parents are on maternity leave, and your borrowing capacity is restricted even further.
For example “a couple earning $75,000 each with no kids and a $5,000 credit card limit has a borrowing power of $925,000 (mortgage @5% over 30 years).
With one child, that borrowing power drops to $895,000. With two children, it falls to $825,000 and with three kids, it sinks to $780,000.”
So how do you increase the chance of your loan being approved?
When you’re on maternity leave, the choice of lenders becomes limited and you’ll have to meet some additional requirements. This includes showing that you have sufficient savings to cover expenses, and arranging a letter from your employer stating a return date, base hours and remuneration.
But there is more you can do to set yourself up for success. It’s all about being proactive. So, planning ahead is a must.
Here are our top tips to maximise your borrowing capacity:
- Reduce or stop voluntary superannuation contributions, as this directly detracts from your yearly salary.
- If possible, increase your income by working extra hours before going on maternity leave.
- Reduce or eliminate credit card limits and debt.
- Reduce your living expenses where possible, e.g. limit takeaway, use public transport instead of Uber, etc.
- Start putting away some cash each month to cover expenses while you’re on maternity leave, e.g. petrol, bills, groceries, etc.
- And, put any extra money into a high interest account to get the most out of your savings.
For more saving strategies click here.
It also helps to have someone in your corner.
Once you’ve mapped out some strategies to maximise your income and savings before going on maternity leave, the next step is to contact a mortgage broker.
As someone who understands what the banks are looking for, a broker can quickly determine which lenders would suit you best. They can also help guide you through the application process for the best chance of having your loan approved. Ultimately, it means you’ll have someone in your corner when talking to the banks.
Want to learn more?
The Neue Black team is here to help you create a plan to save for a deposit and qualify for a loan. Book your complimentary strategy session now and look forward to a healthy financial future for you and your family.