For many, starting a family is an important step in life – a representation of growth in adulthood, of having a helping hand to shape the future, of leaving a heritage. Having children comes with your own financial responsibilities, but one area that investors don't often think about is the impact it can have on their borrowing power if they want to buy their own house or investment property.
"One of the biggest impacts of having children is the simultaneous reduction in household income and the increase in other daily expenses. Becoming a parent is an important life event – it is physically, emotionally and financially intense, "explain Molly Benjamin and Betsy Westcott of the Ladies Finance Club.
"When you start a family, it's more important than ever to make sure your income is secure. Expenses such as extraordinary medical expenses for a mother or child, the mother having to stop working sooner than expected or the fact of realizing that the car or the house is not large enough to meet your New family can be a big blow to your budget and finances if not planned.
"Remember that you will be more at home, so expect to see an increase in daily household bills like electricity, water, gas, the phone, medical care and car maintenance. Hitting these payments on a credit card can lead to a slippery downward spiral.
"Regarding the children and your mortgage application, as an indication, each child you have can reduce your borrowing power from $ 30,000 to $ 70,000"
”Unfortunately, many Australians do not adequately prepare their household budgets for the pressures of educating children. Benjamin and Westcott note that "the majority of Australian families live pay-to-pay, and while this may be suitable for weekly expenses, they often panic when the quarterly electricity bill arrives."
Working in a typical day job, it can be difficult to maintain a comfortable lifestyle for you and your household, especially if you have small ones or have one on the way. So many Australians are turning to real estate investing as a way to generate passive income and long-term capital growth, or possibly allowing them to retire from nine to five jobs.
But it's important to consider where your borrowing power lies in all of this. Investing in property as a parent is very different from investing as a single person or as a couple – especially financially.
According to a government study, it costs about $ 17,000 a year on average to raise two children – a blow to any household bank account. As a result, many parents may find their borrowing capacity hindered by the simple fact that a child's education expenses eat up a large chunk of their finances, which in turn affects how a lender will view their lifestyle expenses.
“When you apply for a loan, the lender assesses your living expenses. The exact formula they use will vary from bank to bank, but living expenses are usually assumed to increase with each dependent child you have, "says Louisa Sanghera, CEO of Zippy Financial Group.
Lenders have been particularly cautious when it comes to assessing potential borrowers following the royal commission. Sanghera points out that "a debt or expense of $ 5,000 can reduce your borrowing power by about $ 25,000."
Obtaining a loan can therefore be very trying for those who have heavier household expenses, in particular childcare and school fees.
"When it comes to children and your mortgage application, banks take into account a variety of factors, but as a general rule, each child you have can reduce your borrowing power by 30,000 $ to $ 70,000, "Sanghera said.
"Maternity leave is one of those areas that investors should carefully plan around … once you fall into one income, even temporarily, your power to 39; loan will be affected "
"Imagine you have three children, each going to daycare or private school at a cost of $ 10,000 each or $ 30,000 in total per year. This could then reduce your borrowing power by $ 150,000 – and the bank didn't even factor in other costs, like diapers and food.
"It is crucial at this stage to have life insurance, total permanent disability and trauma insurance, which means additional expenses.
"If the working parent cannot work due to injury or illness and there is no income protection, the family could end up waste a lot of time. Most people also don't realize that their insurer will not pay to take time to sit at their child's bedside if they are seriously ill, "say Benjamin and Westcott.
Set your priorities directly
The key to being able to balance your finances favorably by supporting children and investing in property is to have a plan.
Benjamin and Westcott advise parents to "review your goals based on what is your highest priority – we suggest you list your goals in the short term (one to three years), medium term (four at six) and long term, and then label what the needs are versus the wants. Then prioritize them from most important to least important. Starting a family means that your priorities will change. »
This means that parents must see the monetary inflows and outflows realistically and capitalize on all the benefits to which they are entitled. "Be clear about the amount that the family unit will earn in income. Find out what government support you are entitled to, such as family tax benefits, parental leave, father and partner, ”suggest Benjamin and Westcott.
"Determine what family expenses should be, including the initial costs of having a baby plus current expenses. Separate fixed expenses, such as mortgage or rent, insurance, medical care, child care, car, utilities, memberships and transportation, flexible expenses like food, clothing , entertainment, gifts and vacations.
"They also recommend tackling the debt as soon as possible:" think about the big purchases you may need to make, adjust your spending habits to make sure your family's needs are met, pay off your debts and probably stay ahead of mortgage payments so you can take repayment leave when the baby arrives. "
You can also save on child care by getting help wherever you can find it. »
The average cost of pre-subsidy child care in Australia is $ 109 per day, but can be as high as $ 180 per day in capitals, "said Benjamin and Westcott.
So if you can take your own parents, family members or friends to help you, it will go a long way!
Sanghera also notes that parents have to watch out for the little things that get in the way of their finances almost without them noticing.
"Look for" money leaks "- things like interest on credit cards, subscriptions and memberships you don't really use – and all the other ways to cut your spending and increase your attractiveness to banks, "she recommends
"Maternity leave is one of those areas that investors need to plan carefully. If you are planning to have children, then it may be worth borrowing as much as possible before going on maternity leave – once you fall on one income, even temporarily, your power borrowing will be affected again. »
By preparing to save early, parents can set aside a solid budget for long-term investments. »
A financially savvy couple we spoke to started practicing what it would be like to live on their income minus child care costs six months before the baby was born. That way, when it came to paying the child care fees, there was no massive shock or surprise, and they also built up a nice little emergency fund ", Underline Benjamin and Westcott.
"The best way to build your financial future during this period is to often put small sums in your mortgage and sacrifice your salary in your super to make compound interest work for you. The parents we spoke to who felt financially happy and enjoyed their time with their new bub were the ones who planned and were ready for any financial situation! »
