Does Having Dependants On A Home Loan Application Affect Borrowing Power?

Children are a gift…but they can also be a serious drag on your borrowing power.

How can you borrow more than the amount you need even with dependants?

What’s The Problem With Having Dependants?

To be clear: banks aren’t against children but they are concerned about your capacity to pay back your home loan if you have dependants.

So they look at your income and living expenses.

Having dependants means you have higher commitments, which in turn lowers your disposable income. Lenders will take note of this when you apply for a home loan.

Most lenders use the Household Expenditure Method (HEM) to calculate your living expenses. You’ll also have to provide an estimate of your living expenses. This is to determine whether you’re above or below the average cost of living.

The bank will use whichever one is higher to calculate your borrowing power.

The minimum living expenses for large families can vary from lender to lender. However, living expenses increase with each additional person in the household in most cases.
Please note that some lenders cap living expenses at a certain amount. This favours larger families quite a bit so applying with the right lender is key.

How Can You Improve Your Borrowing Power?

You can dramatically improve your borrowing power by:

• Cancelling unused credit cards:Even if you don’t use them, lenders will take credit cards into account when they calculate your borrowing power. Most lenders also assume that your credit cards will be fully drawn to their limit. Cancel any credit cards you don’t use or even consider reducing your credit card limit to improve your borrowing power.
• Getting a fixed interest rate: Lenders generally add at least 1.5% on top of standard variable interest rates when they assess your home loan. The buffer is used to mitigate potential rate hikes in the future and can greatly reduce your borrowing power.However, if you fix your interest rate for at least three years, the buffer isn’t added. This means you can borrow more.
• Having updated financial records: Updated financial records are extremely important especially if you’re self employed. Banks assess your borrowing power using your two most recent tax returns and account statements. Outdated records will not inspire confidence in the lender and can lead to your loan being declined.
• Renting out your property: You can rent out an existing property and use the rent income and negative gearing benefits to increase your borrowing power.
• Choosing the right home loan: Home loan features such as a line of credit can impact your borrowing power. Lenders use different assessment rates for different loan types so only go with the features you really need.
• Saving a large deposit: If you have a 20% deposit, you won’t need to pay Lenders Mortgage Insurance (LMI), which can amount up to several thousands of dollars. LMI is a one-off fee usually charged when borrowing more than 80% of the property value. A large deposit can go a long way to improving your borrowing power.
• Going with a lender that can accept your income: Different lenders treat casual, contract and full time employees differently. Overtime and bonus income are also assessed differently. By going with a lender that can accept your income completely, you can automatically increase your borrowing capacity.

Please note that some banks may also assume that your income estimate doesn’t include expenses such as private school fees. They may add them in their calculations and essentially count them twice and therefore, lowering your borrowing power.

We can help you improve your borrowing power and get approved with the right lender. Call us on 1300 889 743 or complete our free online assessment form today.