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Expenses and your borrowing capacity

Just as lenders have different views on how income is treated, the same applies to expenses. 

Household expenses
Each lender will have its own method for estimating your general living expenses based on factors including the number of adults, number of dependents and number of vehicles. The higher any of these variables, the higher your calculated living expenses and therefore the less you will be able to borrow.

Household expenses in particular are receiving much more scrutiny from lenders. Lenders are now generally wanting to go through your bank and credit card statements so they can see how much you are really spending a month.

Loans with other lenders
If you will continue to have loans with other lenders (as might be the case if you have investment property) then these will be recorded in your commitments. Be aware that many lenders will place a loading on other bank commitments above their standard variable rate. Also they will calculate the repayments based on the loan being fully amortized.

The net result of this approach is that it makes your loan repayments appear much higher than they really are. This can have quite a significant impact for property investors with several properties who want to keep building their portfolio. It is not unusual for property investors to hit a road block with their lender because they can not pass their serviceability test – even though they clearly have sufficient capacity to fund additional properties.

There are however some lenders that will assess other bank loans at their actual repayment which can significantly increase your borrowing capacity.

Joint loans
Let’s say for example you bought a property jointly with a friend 12 months ago for investment. The loan for the property is $400,000 and the property rents out for $400 a week. And now you want to buy a home with your partner and need a new loan of $400,000.

Your loan commitments will be based on total loan commitments of $800,000, not $600,000 (New loan $400000 plus half of investment loan)  as many people expect. This is because as a party to the loan you are jointly and severally responsible for the debt. For example if your friend got injured and couldn't’t make their share of the loan repayments you would have to make the repayments or risk losing the property. Therefore the full $400,000 will be recorded as your commitment.

To make matters worse only half the rent can be used as your income as this is all you are legally entitled to.

Aside from the other issues and risks that can be associated with joint ventures it is worth considering how it will impact on your future plans.

Much the same rules apply as above. If you go guarantor for someone else you are jointly and severally liable for the loan. As such the full loan amount will be recorded as your commitment.

Credit card and personal loans 
Credit cards, personal loans, store cards, and products bought on interest free, all impact on your borrowing capacity. Credit cards in particular can have a significant impact. Whether you are using the card or not, or even if you are clearing the balance each month, lenders will still record the limit as a commitment.

So if you have a card with a limit of $20,000, most lenders will view this as a $600 a month loan commitment. 

If you intend to continue renting after you obtain the home loan this will be added to your expenses. Exceptions to this would be if you are only renting for a short period. As might be the case if a lease was continuing for a number of months on a property you had purchased.

Child maintenance
If you are required to pay child maintenance on an ongoing basis then this would be included in your expense. The lender will also want to see any court ordered or settlement agreement to see what other expenses you may be responsible for like school fees.

In a number of the above situations some lenders will assess aspects differently which will be more favourable to your borrowing capacity which is why is important to have your situation properly assessed by a broker. If you only talk to one lender you will be limited to their policies.

Contact us to discuss your home loan requirements or a for a review of your current lending.