Financially Preparing For Parenthood with Ben Schafer
Finance and parenthood
Home finance and parenthood are life events that often coincide. This can be couples planning their future homes together, or new families looking to plan around their changing lifestyle requirements. Given the current interest rate environment, along with the difficult property market, future planning your finance strategy is becoming increasingly important.
As the senior finance broker at Track Financial (and father of two young girls), I’ve been helping growing families secure and protect their homes for over 18 years. Some of the common themes we discuss revolve around how a lender will treat your income, including any parental leave periods, your realistic cashflow throughout the process, and some safety measures you can put in place to protect your family. The below provides some high-level guidance from a finance perspective, however your final strategy should be tailored to your individual circumstances.
1/ Planning a family around a new purchase
Planning a new property purchase, whilst simultaneously planning your future family has various stages. If you are already expecting, then you have an obligation to disclose this when looking for finance, and a lender will want to understand your postpartum income and expense position. At a high level, you might assume that when you start a family, a likely outcome is to have one full-time income and one part-time income (once returned to work). A lender will then assume your ongoing expenses will increase by between $500 to $1,000 per month (some expenses will reduce some will increase). Depending on the specifics, this can reduce your borrowing power by hundreds of thousands of dollars, putting home ownership out of reach until there is a significant change to your income or expense position.
While not always possible, from a financing perspective it’s always going to be easier to secure a home while you still have two full-time incomes, then look to plan your family around your expected future cashflow position (discussed in point 3). This is where it is critical to understand what your actual budget may look like, including savings buffers, or variable incomes such as bonus payments or commissions, when determining how much to then borrow for your purchase. Remember to be conservative, and build in as many safety buffers as possible (see section 3).
2/ New parents who are looking for a property
If you are currently expecting, but also need to apply for finance, lenders will need a clear picture of all the future changes to your income, and how we plan to mitigate any temporary income shortfalls. At a high level this can include;
1) Understanding exactly when you will be returning to work,
2) What your income position will be while you are on parental leave (including any Centrelink payments),
3) On what basis you will be returning (i.e full-time, part-time, casual),
4) Your earnings when you return,
5) If you have sufficient savings to cover any extra costs in the interim,
6) Your likely expense position when you return (especially around childcare).
Lenders will require a detailed letter from your employer confirming this information. If you are self-employed, demonstrating your savings position to the lender becomes more important.
New expenses will also need to be accounted for. For example, if we are asking to use your ‘return to work income’, we may need to also build in an allowance for additional childcare costs for the days you are working, even more so if you plan to return full-time.
Some additional incomes we can use when looking to borrow with a young family include;
· Family tax benefits A & B (depending on age)
· Government parenting allowance (depending on age)
· Child maintenance payments
If you are a single parent, there may also be additional government assistance, such as low deposit schemes. Income will be limited, so it may not always work out, but if you can qualify for these schemes, and your income is sufficient for what you need, then it may save you thousands in insurance fees.
3/ Securing your cashflow
While securing finance is one element, securing your actual cashflow position is critical. What a lender allows you to borrow and what you can realistically afford (with safety buffers in place) can be two different calculations. While budgeting is somewhat arduous, gaining a true handle on your month-to-month expenses can not only save you from future financial hardship, but also help reduce interest and pay down the new loan faster. Even small changes can make a significant difference over the loan term – As an example, if you could find an extra $100 per week to offset your loan interest, that a saving of $182,347 over the full term of a loan (assuming a $500,000 loan at 6% for 30 years).
Savings buffers will be the key, and some possible strategies that may utilise your savings effectively for extra protection include;
1) Holding back some of your deposit as a cash buffer to replace any income that may be lost through your parental leave. Even if this means paying Lenders Mortgage Insurance (LMI), the protection of holding onto cash can be worth it.
2) Conversely to point one, you could look to put extra cash in and reduce the loan limit and associated monthly outgoings if that better suits your budget. This will just depend on your individual circumstances.
3) Cash can also be held back to cover any larger upcoming costs, rather than having them paid for out of your regular cashflow – i.e future car purchases, education or childcare costs that may only have a set time period (i.e childcare changing to public schooling as the kids get older).
4) Fixed interest rates can be used as a way to lock in repayments and provide certainty to your budget. While you may (currently) pay a higher interest rate, the peace of mind a fixed repayment brings could be preferred if you are concerned about your ongoing budgets. Fixed rate terms can be set to coincide with future changes to income or expenses.
5) Keeping bonuses or commission payments out of a lender’s income assessment will keep these lump sum cash inputs as additional earnings that were previously not budgeted for.
Each of these strategies may suit different families depending on your specific circumstances and which family phase you are in.
4/ Protecting your family post financing
After securing financing, it’s important to plan for and protect your family from unexpected changes, especially during times of low income.
You should set a goal to have at least six months of your regular outgoings (including the mortgage payments) saved in an emergency fund. This can be held in offset or perhaps redraw accounts (note – don’t use the redraw if you have an investment property due to potential tax implications). While you may not have this amount right away, it’s good to at least set the goal as something to work towards.
Personal insurances are also essential. Now that you have a large debt, you should carefully consider protecting your family against unexpected life events. This can include;
· Income protection,
· Trauma protection,
· Total and permanent disability,
· Life/death insurance.
5/ Ongoing budgets using your home loan
Once we have your new finance setup, this is also an effective place to store your safety funds. You can use the offset or redraw accounts to help with ongoing cashflow management.
· The use of multiple offset accounts can help to separate funds into different expense accounts. For example, a daily spender, a long term bills and an overall saver account. Having these setup as offset accounts, you will also save interest and help pay your loan off faster.
· A budget planner can help forecast the quarterly or annual bills that sometimes catch us off guard. We can provide some templates to help with this.
· Loan redraw vs offset accounts. While both offset accounts and redraw accounts can help you save interest, there is an accepted psychological difference between using the redraw to save money vs using an offset account. If the money is too accessible, it’s much more likely to be spent, so have a think about which might suit you best.
Financially preparing for parenthood and all the changes to come is the key. These scenarios will all be different depending on your circumstances, and we can work with you on all the variables until you are comfortable with the strategy, then review and make changes as needed.
To arrange a personalised strategy, you can book a free initial consultation to run through your current and future borrowing power here: https://calendly.com/benschafer/initial-finance-discussion
Ben Schafer
Senior Broker & Director
Track Financial
Some resources that may help your planning
Try our online budget planner: https://www.trackfinancial.com.au/mortgage-calculator/budget-planner/
Estimate your monthly mortgage repayments: https://www.trackfinancial.com.au/mortgage-calculator/extra-repayment-calculator/
See how much small additional repayments can save you over time: https://www.trackfinancial.com.au/mortgage-calculator/extra-repayment-calculator/
Test how much interest you can save by utilising offset accounts for bulk savings: https://www.trackfinancial.com.au/mortgage-calculator/home-loan-offset-calculator/