Expecting a child whilst simultaneously applying for a home loan can be a tricky and confusing process to understand. The excitement of a new addition to any family brings challenging barriers in the eyes of lenders with several factors influencing the loan decision process. It is therefore important for applicants to be aware of certain requirements and policy that will impact the final decision by the banks.
Here are some areas of consideration to be aware of:
Serviceability Challenges
Any addition to a family brings an extra mouth to feed and consequently an increase in living expenses. It is no surprise that the additional expenses and a reduction in income through maternity or paternity leave will directly impact your serviceability capacity for a home loan.
Banks will use different formulas to estimate cashflow to make a loan decision based on several factors involving, existing living expenditure, likely outflow once the baby has arrived and any predicted changes to your household’s income.
The banks are aware that although parental leave may be paid by the employer, it traditionally doesn’t last for the entire leave period. This means that there is likely to be a period of time where your household income will not sufficiently ‘service’ your commitments.
Is there a way?
Although it is more challenging for banks to approve a loan while on parental leave, it is still possible to secure finance. The easiest way to provide lenders with the confidence you can meet your household cash flow needs and maintain your mortgage is to show you have enough cash reserve available to cover the serviceability shortfall while on parental leave. For example, if your annual mortgage repayments is $20,000 and you will be off work taking unpaid leave for 6 months, then the banks would want to see cash reserves of $10,000 plus half of your household’s general living expenses in cash.
While some banks try to be flexible by considering the income on the applicant on leave, not all banks will do the same and therefore deem that applicant as unpaid or unemployed during this period. It is therefore an option for some to demonstrate employment through a letter by their employer outlining their role, return date and income that can be utilised in the decision process. This can help prove to lenders that the financial obligation will be met by the applicant when they return to work.
Already have a home loan?
If you already have a home loan in place and are expecting a baby then as long as you have been diligent with your repayments and can manage your finances then there will be no issues. It is important to plan well in advance to ensure your cashflow is managed and you can cover your existing repayments on top of the new addition to the family, particularly while household income is lower than usual.
Differing policies and lender requirements it can be confusing and challenging in understanding the options when applying for a loan whilst expecting a child. 40 Forty Finance can point you in the right direction through this challenging and complex process to ensure the right product is selected and necessary steps are implemented to put forth a strong application.
