AFTER reading an article from the New York Times this week about lenders in the US being more cautious about giving out home loans to those that have taken time off work to have a baby, it made me wonder, are they taking lending criteria too far?
The article wrote that Americans who want a mortgage and have taken time off work to have a baby, aren’t employed because they are looking after a child or even if they are planning to go back to work in a matter of a few weeks, they may be penalised or have their loan application rejected.
Lending guidelines in the US according to a lender quoted in the article are that lenders “deal in guaranteed income” so if your income on paper is half of what you usually earn because you have been on maternity leave for six months, the lender will only take into account the income you earned.
A leave of absence from your job often prevents you from getting a mortgage altogether in the US, and in some cases, you need to re-apply for your home loan when you return to work after you go on maternity leave. This I’m sure would be frightening situations to many prospective home buyers if this was the case in Australia!
Some may argue that the US mortgage market is going from one extreme to the other starting with those NINJA loans (‘No Income, No Job and No Assets’) where lenders were offering loans to anyone, which fuelled the American sub-prime mortgage crash and can be at least partly to blame for triggering the global financial crisis. And now they are putting a dagger through the dream of owning a home and starting a family.
While there is no such law in Australia that allows lenders or brokers to ask if you’re pregnant or planning to have a family in the near future (the only factor they take into account is the number of current dependents you have which obviously affects your living expenses), the issue in the US begs the question of is this the future for Australia’s home loan market? We’re already seeing even tighter lending criteria with some lenders taking the required buffer allowing for interest rate rises from 1-2 percent to 2.5 percent.
But are lenders in the US taking precaution for their customers’ interests as much as their own? We all know that children cost money so lenders could be simply making sure you can afford your repayments when you have kids. It does raise an important issue that first home buyers who are new to the concept of a mortgage and want to start a family should take into account the added costs involved with raising kids. While you don’t need to tell your lender here, you do need to do some financial planning.
The Federal Government’s Australian Education International website shows that a typical first child will cost on average $3600 per year and $2700 per year for every child thereafter. So for one child it’s an extra $300 per month on top of your expenses and if you have two it’s $525 per month. This doesn’t take into account if you want time off work and the medical bills while you’re pregnant.
Michelle Hutchison is Consumer Advocate at RateCity.
The above information is general only and does not take into account your objectives, financial situation or needs.
Your say: Do you think mortgage lenders have a valid reason to be concerned when you apply for a home loan? Or are they just going too far? Email us on [email protected]
