Applying for a home loan with a baby on the way
I am often asked the question: Can we apply for a home loan when we have a baby on the way? An increase in the size of your family can be the catalyst for upgrading your living circumstances. But what issues do you need to consider before you prepare your loan application?
As with all loan applications you (and the lender) must consider your incomes, employment stability, expenses, and other liabilities (loans, credit cards etc). However, there are some unique things which must be taken into account if you know that your circumstances will soon change (and these equally apply even if you already have a loan!)
How do we afford the loan repayments while we are earning one income?
How will our income change after we have a child?
How will our expenses change?
Prior to the birth of your baby you will enter a phase where one or both parents may take a period of parental leave. While some are very fortunate to enjoy strong support from their employers during this period, others will see a substantial reduction in their family income for up to 12 months.
In this case lenders are simply looking for a plan of how you will manage your loan repayments during this period of reduced income. They will need to understand your changed cash flow during this time, and whether there will be a shortfall. If there is a shortfall they will want to know that you have available sufficient savings to cover your loan repayments and other living expenses while you have a single income. They will also need certainty about when your family income will be restored.
Permanent Change in Income
After their child is born many families change their work arrangements to cope with the additional workload of caring for and nurturing their child. It is quite common for one parent (or maybe both) to reduce their working hours. You should plan for this and be conservative. It is easy to underestimate the demands on your time, and simply how tired you are both likely to be. So, give yourselves as much financial space as possible to work with.
Once again, the lender needs to know your plan so that they are comfortable that you can afford your repayments in the longer term.
Changes to Living Expenses
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 families can spend in the range of $85 to $230 per week. In a more recent study, research by the Australian Institute of Family Studies concluded that the minimum cost of raising a child is $140 per week. So you need to factor in your specific circumstances. Your increased costs will come in 3 main areas.
Firstly, your food, water and energy bills will increase and you also need to take into account that your child will increase your regular costs in consumables such as clothing, shoes, health care and nappies.
Second, you need to factor is some big ticket cost items such as baby carriages, cots, beds, baby capsules and booster seats. These costs are best covered by setting aside savings.
The final consideration is the not inconsiderable cost of child care. Before your child is born you need to investigate the availability and cost of child care centres in your area.
Of course, a “bonus” may be that some of your other discretionary expenses may decrease. You will probably be going out less often and perhaps expensive holidays will be off the agenda for the next few years.
What Do Lenders Require?
Apart from wishing to understand your own personal plan for managing your finances as your family expands what else do lenders require? Depending on your specific circumstances they may require one or more of the following:
If you are on parental leave, a letter from your employer stating the full circumstances of your leave: your agreed return to work date, your hours per week, and your salary upon return.
They will require your living expenses declaration in the loan application to be based on your future circumstances; i.e. including the cost of feeding, clothing and caring for your child.
Your savings account statements showing that you have sufficient funds set aside to adequately cover for the period when you will be earning reduced income.
Should We Wait?
While in practical terms this may make your loan application process simpler, the real answer is that it should not really matter! Whether you already have a mortgage and are planning for a baby, or you already have a baby and are planning for a mortgage the financial puzzle remains exactly the same.