How do children fit into a mortgage application?

At the time when our parents were buying houses, there was a “traditional life process” that most people have followed.

People often got married, then bought a house, then had children. But over the years, as people began to get married and have their children later in life, and houses became too expensive for most young buy in the first years of their working life, things became a little less simple.

Now it is much more common to see people who have been together for a while while, and who can already have a few children, think about trying to buy a property.

The bad news is that banks are not big fans of people with children who commit big debts, unless you have a very good income.

It’s not that they don’t like children (well, maybe not some of them, but who knows?). In general, they are not fond of everything that sucks money long-term first-time home buyer budgets. And anyone who has children knows that they can be quite expensive tiny creatures for quite a long time.

Rupert Gough, chief executive of Mortgage Lab, says it’s coming back to what the banks consider to be the “basic cost” that you have to cover each month, or the minimum your family must be able to pay expenses to stay afloat.

“If you live on white bread and rice and soy sauce and that kind of stuff you can cut your costs down, but banks always have a minimum cost they use for each category.’

He said that children are another of these categories. Even if a family is capable to reduce their costs — perhaps by having really cheap childcare, for example —the bank will always add a minimum cost to its calculations than their budget will have to cover. He says it’s usually about $500 a month at a minimum but this will vary between banks.

Gough says that means, all other things being equal, a couple of first-time home buyers who apply for a loan and have children will have to earn $500 a more months after tax per child than someone who does not yet have children.

“The costs increase for a couple with children compared to a couple without children. The irony is that a couple with children needs more rooms, so they probably need more expensive house, but the bank must take into account the additional costs.

It is much more difficult for couples with children. The $500 is after tax, so that the couple must earn an extra $800 a month.’

Any expenses that you have for your children can also be considered ongoing indefinitely, so it is best to apply for a loan after the grant for your childcare comes in when children are three, for example, rather than trying when they are two and a half years with the hope that things will soon become cheaper.

‘A quirk of the CCCFA is that with the cost of education, whether it is public or private, if a child is 11 years old, you only have two or three years left of schooling, but the bank still has to take this as an ongoing expense throughout the whole mortgage,” Gough says.

“It’s often a frustration for people. Even if your child only has a few remaining years in school or [with a particular cost] the bank has to take it as if it were spread over 30 years. Whatever your expenses are now, even if you are about to get a grant, you have to survive until it happens then the bank must take it as it is now. The message is that the cost of having a child fluctuates according to their age but the bank only takes your current expenses, and you have to take that on the chin.’

Gough says it’s easier to get into the market before having kids as a bank does not query your expenses once the agreement is concluded, unless you need to borrow more money. He says that while people often wait to have more incomes, house prices also tend to rise over time, so waiting is not always the best financial option.

‘You know what your expenses are when you are a landlord, whereas when you rent you are subject to the rent costs at that time. Once you have a mortgage the bank does not reassess unless you ask for more money. Having a child once you have a mortgage, the bank is not going to repay the loan because you have an additional cost. It is up to the owner to think about how they will pay for it [at that time].’

So, if you have children, what can you do? Tips for first-time home buyers with children, it’s about the same as for any other buyer, except that you will have to prove that you can afford to cover your family’s expenses. Keep your spend as little as possible during the three to six months preceding your application and increase your income as much as possible.

Run as much budget surplus as possible and prepare for a surplus questions about what you spend on your children.