How does having children affect borrowing power?

Welcome to the finance update for the week ending 28 October, 2023.

Disappointing inflation figures during the week have put the prospect of another cash rate increase back in the news which is news none of us want to hear. Hopefully the RBA will recognise that the three primary contributors to the result – petrol prices, insurance costs and rent – are all outside of the consumers control. As an article in The Guardian stated during the week, a Melbourne Cup Day rate rise would not be tough on inflation, it would just be cruel.

In this week’s newsletter, we take a look at the impact that having children has on borrowing capacity.

Adding another mouth or two to feed increases living costs, a factor considered in mortgage assessments evaluating loan repayment capability.

Dependents can impact your financial situation and borrowing power in diverse ways. While children are a blessing, their expenses, covering everything from food and clothes to education, dentists, and entertainment, significantly reduce disposable income for loan repayment. Lenders take this into account when assessing your borrowing power.

Lenders evaluate income, including child support or government assistance, as additional income when assessing borrowing power however, reduced income due to caregiving responsibilities may have the opposite effect. The lender also considers whether you plan to return to full-time work.

Having kids typically results in more financial commitments for families compared to couples or singles without children. For many Australian families, this translates to a lower disposable income, affecting the amount available for home loan repayment.

According to the Australian Institute of Family Studies (AIFS), the estimated weekly expenses for low-paid families with two children (a 6-year-old girl and a 10-year-old boy) amount to $340 per week, or $170 per child. This totals yearly costs of approximately $17,680 for two children or $8,840 for one child, so as you can see, the impact is significant.

Example

So to what extent does having a child affect on borrowing power? Let’s look at a side by side comparison –

Couple A
Paul and Sarah make $65,000 each per year (median Australian employee income from the ABS).

According to analysts at investment bank UBS, the ‘basic’ lifestyle has an estimated annual expense of $32,400 ($2,700 per month) which is the figure we will use in this example.

They have no kids, which puts their borrowing capacity for a 30 year loan with a 6% interest rate at $665,590.

Couple B
Tom and Kate earn the same amount as couple A, except they have two children.

Their annual living expenses amount to $50,080 (includes the AIFS’ cost of raising two kids), which is $4,173 per month.

This means their borrowing capacity for the same loan at $560,710. That’s more than a $100,000 decrease.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.