Do Childcare Costs Impact Mortgages?

Welcoming a new member to your family is an incredibly rewarding experience, but also an incredibly costly one. In fact, in the UK, average childcare costs in the UK have climbed to nearly £14,000 per year for a full-time nursery place (50 hours a week). In high-cost areas like London and the South East, that figure easily shoots past £20,000.

For the average income in the UK, childcare costs alone can, therefore, wipe out a staggering 35%. Due to these costs, which are some of the highest in Europe, many parents are better off not returning to work, as they would effectively be paying to do so, especially those on lower incomes.

Does this impact your mortgage application?

Well unsurprisingly, yes, it absolutely does. When calculating how much they can safely lend you, mortgage providers strictly balance your income against your committed outgoings. Most lenders class childcare as an unavoidable commitment, like loans and car finance.

If 33% of your income is already spoken for, your affordability is, of course, likely to be significantly reduced. These costs are recurring and essential for you to maintain your employment, and therefore repay the mortgage loan.

The good news is, not all mortgage lenders look at childcare expenses in the same way. While some stress-test your finances strictly, others are far more flexible and lenient toward growing families.

Gross vs. net costs

Because the government has recently addressed some of the childcare cost issues facing working parents, some childcare costs won’t deliver such a huge blow to your mortgage affordability.

This is because working parents of children aged 9 months and older are now eligible for 30 free hours of childcare per week (during term time, so 38 weeks per year). This means that a family's net costs can look very different to their gross costs. Here’s how it works:

If a family qualifies for the 30 free hours and also uses the Tax-Free Childcare scheme (an account you set up specifically to pay for childcare costs, and the government chips in a 20% top-up - so £2 for every £8 you pay in), their an annual childcare bill of £14k drops to around £6,500-£7,500 in actual costs to them.

While parents still need to cover 14 weeks of holidays at full price, the schemes used back to back reduces the childcare element of their outgoings down to closer to 15% of the average UK income. Although this is still a significant amount, which lenders will certainly still take into consideration, it should be less impactful on your borrowing power if used correctly.

Can Child Benefit be used to balance this cost?

Some lenders accept benefit payments on top of personal income when they calculate your affordability. With a secure benefit like Child Benefit, most UK mortgage providers will now consider this alongside your other income.

However, keep in mind that this will depend on the age of your children. While it will provide some balance towards high nursery costs, and school fees, if you pay them, restrictions on how much of it they consider may be reduced as your children approach the age of higher education (16-18).

A mortgage broker should be able to help you find those lenders willing to look at 100% of your child benefit income.

Tips for parents preparing to apply for a mortgage

While there are certainly challenges to securing the mortgage loan amount you need when you’re also raising children, here are some tips to optimise your chance of success:

1. Speak to a mortgage broker - Not all mortgage lenders look at childcare costs or childcare benefits in the same way, so it would be beneficial to approach the lender most suited to your specific circumstances

2. Be upfront about costs - While it might be tempting to ask relatives for temporary help or reduce your working hours before you apply to conceal these costs, it’s best to be forthcoming with your actual long-term costs. As well as looking through multiple months of bank statements, mortgage lenders are likely to ask you about your childcare costs and current/future working patterns directly. They might reduce your loan, or even reject your application if you’ve hidden costs intentionally and they find out later in the process

3. Make sure you declare net costs - As explained earlier, this can make a huge difference to your affordability. But lenders won’t always know you use these schemes unless you tell them

4. Time it right if possible - If you have the luxury of waiting for natural drops in childcare costs, whether that’s qualifying for government schemes, or your child starting state school full time, lenders will factor these imminent reductions into your future affordability