23 Feb 2023 Podcast: Q & A – Borrowing Capacity – HECS, Rentvesting & More!

In this Q & A episode, Maddie hits Evelyn with the big and common questions around borrowing capacity, with some important answers for anyone who has goals and aspirations as a home buyer, owner or investor.

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Please find a Podcast summary below with the interview highlights:

In this episode of You Have My Interest, Evelyn and Maddie tackle common questions about borrowing capacity, exploring how it’s calculated, factors that affect it, and practical ways to increase it.

Key Topics Covered:

1. Hex Debt and Borrowing Capacity:
   • Hex repayments are based on income, not the debt balance, so paying it off early may not always improve borrowing capacity.
   • Evaluate whether reducing Hex debt or retaining funds for a deposit has a greater impact on achieving your property goals.
2. Impact of Dependents:
   • The number of children influences borrowing capacity via the Household Expenditure Measure (HEM), which banks use to estimate living expenses.
   • Factors like household income and location also affect HEM, with more children generally leading to higher assessed expenses.
3. Actual Living Expenses vs HEM:
   • If your stated expenses exceed HEM, banks assess the higher figure, potentially reducing borrowing capacity.
   • Temporary spikes in spending (e.g., renovations) may be excluded if justified as one-offs.
4. Living at Home and Future Expenses:
   • Banks consider post-purchase living costs even if you’re currently living at home. For investors staying with family, banks may apply a “notional rent” (~$150/week).
5. Credit Cards and Buy Now, Pay Later (BNPL):
   • Credit card limits—not balances—are assessed, with a repayment rate of 3.8% per month of the limit, significantly reducing borrowing capacity.
   • Every $10,000 of credit card limit can reduce borrowing capacity by ~$70,000.
   • BNPL facilities like Afterpay are treated similarly to credit cards, with limits factored into calculations.
6. Salary Packaging:
   • Often seen in healthcare, salary packaging can benefit borrowing capacity if voluntary deductions are added back to gross income.
   • However, liabilities like novated leases (car leases) can negatively affect borrowing capacity due to bundled costs (e.g., fuel, maintenance).
7. Increasing Borrowing Capacity:
   • Increase income: Seek pay rises, work overtime, or add a second job.
   • Reduce expenses: Ensure spending is below HEM where possible.
   • Lower liabilities: Close unused credit facilities or reduce limits on credit cards and BNPL accounts.
   • Be cautious consolidating loans (e.g., car loans) into a mortgage, as lower interest rates may lead to higher long-term interest costs due to extended loan terms.

Key Takeaways:

• Understanding and managing expenses, liabilities, and income are essential for maximising borrowing capacity.
• Credit card limits, even if unused, significantly impact borrowing capacity.
• Salary packaging and liabilities like novated leases must be carefully considered when applying for a home loan.

Listeners are encouraged to submit their questions for future episodes and explore more resources at Evelyn’s website.