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How Your Dependents Impact Your Borrowing Power

Like it or not, having dependents can significantly affect your borrowing power.

Just how much impact can your dependents have on your borrowing power? More importantly, how can you improve your borrowing power? Find out below just how much.


Yes, your kids can lower your borrowing capacity

And no, the banks are not against children. They’re just mostly concerned about your capacity to pay back your home loan. So they look at your income and living expenses. If you have children, these factors are automatically affected and so is the amount you can borrow.

Having dependents means you have higher commitments, which in turn lower your disposable income. Lenders will take a note of this when you apply for a home loan since it affects your living expenses.

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. Since having dependents negatively affects your borrowing power, you’ll need to be careful when estimating your living expenses.

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 though 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 even with dependents?

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 improve 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, loweing 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.


Borrowing power FAQs

What do banks consider when calculating my commitments?

Banks consider a number of factors when calculating your existing commitments. These include:

  • Existing loans: Most lenders may use the actual repayments for your current mortgages and loans. However, some may use a higher assessment rate.
  • Credit Cards: Even if you may not use some of your credit cards, most lenders will assess all of your credit cards as being fully drawn. They will then use 2% to 3% of the credit limit as a monthly repayment in their assessment. There are a select few banks though that can ignore credit cards that are not used or that are paid off in full each month.
  • Personal Loans: Most lenders will use the actual personal loan repayments.
  • Rent-free with parents: With most lenders, living rent-free with parents will have no effect. Some lenders allow for $150 per week as a rent expense in case you need to move out of home.

Note that some banks may lend you more even if you have several mortgages, or credit cards that you aren’t using.

Why should I use a mortgage broker?

There are many benefits of using a mortgage broker. Unlike bank managers, mortgage brokers specialise in different home loans and aren’t tied to any particular lender or product. What’s more, their services are free in most cases.

By using a mortgage broker, you can benefit from their wealth of experience and have a relatively smooth and quick home loan process.

Our mortgage brokers know and understand bank policies very well. We can help you choose the right lender to increase your borrowing power without increasing the costs.

Speak with one of our credit specialists by calling us on 1300 889 743 or fill in our free online assessment form today.