Does childcare affect how much I can borrow for a home loan?

You earn $130,000.

Your partner earns $110,000.

On paper, a household income of $240,000 sounds pretty healthy.

Except you've got two kids in daycare and you're paying $3,000 a month in childcare fees.

Then you speak to a lender about buying a home and the amount you can borrow is lower than you expected.

So, does childcare affect your borrowing capacity?

Yes, it can.

Why do banks care about childcare costs?

When a lender works out how much you can borrow, they don't just look at your income.

They also look at your ongoing expenses and financial commitments to work out how comfortably you could manage the proposed mortgage repayments.

Childcare can form part of that assessment.

APRA's residential mortgage lending guidance says living expenses are a key part of a lender's serviceability assessment because they affect a borrower's ability to meet their mortgage repayments.

How much can childcare reduce my borrowing capacity?

There isn't one universal answer.

A family paying $800 a month in childcare is in a very different position to a family paying $3,000 or $4,000 a month.

Your borrowing capacity also depends on the rest of your financial position, including things like:

• your income
• your partner's income
• the number of dependants you have
• existing home or investment loans
• personal loans or car finance
• credit card limits
• other living expenses.

Lenders also don't all assess every application in exactly the same way.

That's why two households earning the same amount can end up with very different borrowing capacity.

What if my child is starting school soon?

This is where your individual circumstances become particularly important.

If you're currently paying significant childcare fees but those costs are expected to reduce because your child is about to start school, it's worth discussing this before assuming your current childcare bill will automatically determine what you can borrow.

Whether a lender can take a future reduction in expenses into account will depend on that lender's policy and the evidence available.

Why does my borrowing capacity feel low when we earn good money?

Because your salary is only half the story.

Lenders also assess whether you could continue to manage the loan if circumstances became more difficult.

APRA currently requires regulated banks to assess new home loan borrowers using an interest-rate buffer of at least 3 percentage points above the loan's product rate.

That means the bank isn't simply testing whether you can afford the mortgage repayment you see advertised today. This is one of the reasons a generic online borrowing calculator can only tell you so much.

Then your household expenses including childcare where applicable sit alongside that assessment.

So a couple earning $240,000 with no children can have a very different borrowing position to a couple earning the same amount with two children in full-time daycare.

Should I wait until my child finishes daycare before buying?

Not necessarily.

Lower childcare costs may improve your overall financial position, but borrowing capacity is only one part of deciding when to buy.

Property prices, your deposit, income, existing debts, interest rates and what you're comfortable paying each month all matter too.

I'd rather look at the numbers now and understand your options than automatically assume you need to wait another year or two.

If you're planning to buy your first home, you can read more about first home loans with April Six.

In Summary...

Yes, childcare costs can affect how much you can borrow for a home loan.

But the impact isn't the same for every family or every lender.

If you're earning good money but your borrowing capacity has come back lower than you expected, childcare may be one part of the reason alongside dependants, existing debts, credit limits and your other household expenses.

Before changing your plans though, it's worth understanding what's driving the number.

Want me to look at your situation?

If you've got kids in childcare and you're wondering what your home-buying numbers look like, get in touch with Eshanee by clicking here.

Any information or advice contained in this article is general in nature only and has been prepared without considering your individual personal objectives, financial situation or requirements. Before acting or relying on this information, you must consider the appropriateness of this information with regard to your individual circumstances and objectives.

April Six Pty Ltd is a Credit Representative of Astute Financial Management Pty Ltd | Australian Credit Licence 364253 | Credit Representative Number 554762.

Eshanee Collins is the founder of April Six, a Sydney-based mortgage broker for first home buyers and first-time property investors across Australia.

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