Some would consider it discrimination…and in a way, they’d be right. It seems banks are taking the old adage; “Never work with children or animals” – on board and slashing the amount they’ll lend to couples with children as opposed to childless applicants.
It’s not that the banks don’t like kids, it’s just that new legislation introduced as at January 1st this year dictates that banks must practice “responsible lending”. In other words, they have to do everything in their power to ensure borrowers have the capacity to meet their monthly repayments.
For many lenders, knocking off thousands from a loan approval to account for the extra expense of children is commonplace – they’ve been doing it for years.
But now all banks and building societies are adopting the universal Henderson Poverty Line formula – a standardised guide that establishes the cost of living – to estimate how much of a dent raising kids will put in the family coffers.
The guide is based on the theory that the number of children a couple has will greatly reduce their borrowing power. Mortgage Insurer Genworth advises brokers as to the biggest loans that should be made available to clients based on the HPL.
The comparison is quite staggering; for instance, a childless couple with an income of $60,000 who apply for a loan at a rate of 8.5 per cent could be approved for a maximum loan of $280,000. However, add one child to the mix and this drops to $226,000, while four offspring will reduce your loan to just $63,000.
For those who receive family tax benefit payments (which can average around $4000 per annum), the news is not quite as bleak. When this is accounted for as income by lenders, applicants with four kids can expect approval for an amount up to $229,000, which is still 20 per cent less than the DINKS, but a darn site better than $63,000.
So what does this mean for couples who apply for a loan and then have a family further down the track? Well, some are suggesting that if children make such a big difference to their capacity to repay, these borrows could find themselves in a world of hurt once they start introducing kids to the mix.
Essentially, their ability to refinance or upgrade to a bigger and better home – something many people often do when their family starts expanding – could be detrimentally affected or negated entirely.
I can understand the banks’ caution in this situation, given the extra liability they now have to ensure customers can make their repayments. And I know from personal experience that kids are expensive!
However the one thing the industry fails to take into consideration is the fact that childless couples often have a far more lavish lifestyle than us parents. They tend to spend far more disposable income on frivolous luxuries like dining out, while couples with kids are generally too tired to be bothered going to the five star restaurant in town, let alone doing much else that requires oodles of cash!
Then of course there’s the fact that families are simply more careful with cash in general because they have to be. These couples have usually learnt to budget, sacrifice and save their pennies. But try telling that to the banks! Do you need help brokering your mortgage? See what we can do!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).