Bankstown resident, Julia asks
“I’m currently on maternity leave and my husband and I wish to purchase a property. My bank has told me we won’t qualify until I return to work, are there any lenders that can help us before I return to work?“
Fantastic question sent in by Julia, and this one no doubt is a concern for a lot of new to be mums. Here’s the best advice in terms of securing a home loan during maternity leave.
There are selected lenders who have flexible home loan policies and will consider the return to work income for applicants that are on maternity leave at the time of making application.
If you were working full-time prior to maternity leave and you are returning to work on a particular date your lender may require several documents to validate your working status.
These may include a letter from your employer advising the exact date that you are returning to work and the conditions related to your return to work, so whether you’re going back as full-time or part time and the gross income that you will be returning on. Your lender will use this information to consider your return to work gross income and calculate your serviceability.
There are a few lending conditions to this particular scenario. Lenders have a responsibility under the NCCP act to ensure that borrowers can afford the loan repayments during a period of reduced income. Lenders will calculate if there is sufficient income during this period to service the home loan. Typically, the lender would require evidence that you can afford the repayments while on maternity leave and look for an amount of savings held in your account to cover the serviceability shortfall.
An example to demonstrate this would be, an applicant who has taken 6-month maternity leave, results in say, $2,000 a month short fall in serviceability, a lender would require a minimum of $12,000 in savings. How this is calculated is very simple $2,000 shortfall multiplied by 6 months totals $12,000 to ensure affordability and that the household is theoretically able to keep ahead of repayments.
Regardless of whether you have taken 6 or 12 months maternity leave, a lender will use the letter from your employer as the basis to determine your serviceability of the loan. The lender will calculate how many months are left before your official return to work date and calculate the shortfall based on just the remaining income coming into the household. Using their own serviceability calculator, a lender will determine the monthly shortfall and arrive at an amount that equities to sufficient savings in order to meet the loan repayments during this time.
Most lenders will consider any additional or supplementary income coming into the household during the period of maternity leave, such any applicants who receive paid maternity leave, paid parental leave from the government or holiday pay. A combination of temporary income and savings may be factored in when determining whether that shortfall can be met.
In the past lenders could not consider earning potential while on maternity leave even if an applicant returned to work earning a hundred grand a year. While these types of loans are complex lenders are more flexible and open to considering temporary income while maintaining their responsibility to ensure loan repayments can still be serviced whilst one party is not working, whether that be with savings or temporary income, such as paid parental leave or maternity leave payments.
What factors do banks and lenders take into consideration when including paid maternity leave
Lenders and banks will evaluate several factors when considering paid maternity leave as a form of temporary income to substantiate loan affordability. They look at duration of time away from work and regular consistent income.
The central government has a paid parental leave scheme where eligible people receive around $600 per week of government funded parental leave pay. The eligibility requirements include restrictions on not having earned more than $50,000 in the last financial year, you will need to meet the criteria of a work test and demonstrate you’ve worked a certain amount of time in the past 13 months prior to going on leave. There are some limits but typically the parental leave pay is currently $719.35 per week before tax. You do not need to have a home loan to qualify for this assistance it is available to any eligible parent taking maternity leave.
In short if they’re applying for finance for a home loan, lenders will combine all temporary income such as parental leave pay, employers paid maternity leave or holiday leave pay plus excess savings left over after the transaction and provided the total funds are sufficient to meet the serviceability or shortfall for that period of time that the applicant will be off work, it will be considered as part of the requirement to meet the serviceability shortfall.
Common mistakes to avoid when it comes to this type of lending
If you’re looking to buy a property whilst on maternity leave it’s imperative that you secure pre-approval first, the last thing you want to do is buy a property and find out that you are unable to secure the finance you need. It is a common misconception that lenders will automatically consider a mothers’ return to work income while on maternity leave so getting pre-approval before making any commitments to buying a property would be wise.
Even if you have adequate savings to get through the period of maternity leave, pre-approval from a lender is one of the foremost things to secure. Savings will need to be in cash, neither credit cards nor borrowed money is considered
While on maternity leave you would also need a house deposit apart from savings lenders would typically request more than the normal minimum deposit required.
Every lender will have their own lending criteria and while some may not consider temporary income at all, some may be flexible others may be more restrictive and require the applicant to be returning to work within a certain period perhaps 3 months. There is no blanket rule and each lender with have their own affordability calculator and eligibility criteria.
In summary if you are currently on maternity leave and considering a loan application during this time a few key pints to remember are
- You should have sufficient savings in cash to cover the period of maternity leave.
- Request an employment letter stating return to work date, period off work and return to work income.
- If possible prepare a higher than normal house deposit.
- Prepare any forms of temporary income such as parental leave pay, employers paid maternity leave or holiday leave pay plus excess savings this will be considered as part of the requirement to meet the serviceability shortfall.
- Get pre-approval before making a purchase commitment.
Ready to work with us?
If have any questions talk to us today, we look forward to discussing options for you and your family.
Patrick is a Director and a Home Loan Specialist. He has been helping Australians with home loans since 2001. Prior to working as a mortgage broker Patrick was employed by Macquarie Bank for 3 years and also worked as an accountant for a publicly listed company. Patrick holds a Bachelor of Business majoring in Accounting and sub-majoring in Finance and Marketing from University of Technology, Sydney.