How do childcare fees impact getting a home loan in Australia?
Like many living expenses, Australian childcare fees are on the rise — but just how does this impact your borrowing capacity and ability to get a home loan? Let’s take a look.
Why do childcare fees matter on your mortgage application?
Put simply, childcare costs are a major contributor to the financial situation of many Aussie families, which means it comes into play for many lenders looking at home loan applications.
Much of this is because your lender will need to assess your borrowing power and your ability to make your mortgage repayments, whether you’re looking for a first home buyer or a new investment property.
Not only are childcare fees and school fees (from private providers) major expenses on their own, but the influence of these expenses can be evident across all aspects of your finances.
The biggest influence when it comes to being a home buyer is that your borrowing capacity is calculated based on not only your income but also your financial commitments - and dependents are often the biggest, long-lasting financial commitment. You can sell your car to reduce a car loan, but you can't send a child back!
Along with part-time or full-time childcare fees, having children assumes additional costs for homeowners, from medical bills to after-school memberships and subscriptions and larger general household expenditures reflected in your bank statements.
Quite aside from daycare or childcare costs, children also indicate lapsed income from maternity leave and higher outgoing spending on credit cards or personal loans.
However, these things may not always factor into a mortgage lender’s process of assessing your ability to make home loan repayments. The affordability of your home loan (as far as you can make your mortgage repayments) can be measured in several ways.
One way lenders look at expenses is called the Household Expenditure Measure, or HEM. The Royal Banking Commission criticised this in 2017-2019 as underestimating the cost of living and non-essential expenses (for instance, private school fees), which may have led to home loans being approved for too high loan amounts or where they should not have been approved. This has become exceedingly clear with home loan rates on the rise, where many homeowners may be unable to keep up with their rising repayments. Refinancing may not be an option in some cases due to the costs of breaking the loan or not having the home equity needed.
Thankfully, HEM is no longer usually the only benchmark used to calculate loan affordability, with most lenders asking borrowers to report on their outgoings and household expenditures in a much broader range of categories.
That said, as many child-related expenses fall into the " non-essential " category, it’s all the more important to carefully consider the mortgage repayments you can afford on a home loan, particularly if interest rate hikes should continue. You may want to consider working with a mortgage broker to find a home loan that suits you.
It’s also important to ensure you can afford the upfront costs involved in purchasing a home, whether it’s your first time or your fifth!
Not only will you need to make a deposit, but the costs on purchasing a home may include stamp duty, government fees, and if you are paying less than a 20% deposit, you may also be faced with lenders mortgage insurance (LMI).
Be sure to look into circumstances that may allow some of these upfront costs to be waived.
