What are the 5 factors that impact how much money you need to earn?

When the bank looks at your loan it looks to see how much spare cash you have.

They want to make sure you’ve got enough money to pay the mortgage, even if things change. Like if interest rates rise, or you max out your credit card.

5 major factors determine how high or low your income needs to be. Most of them come down to:

• how expensive your new mortgage will be, or
• how much spare cash the bank thinks you have.

Factor #1 – Cash deposit

Let’s say you want to go buy an investment property. If you have a large cash deposit, you don’t need to take out as big a mortgage, so your mortgage repayments will be lower.

That means, you don’t need to earn as much to be approved for your mortgage.

Whereas if you are borrowing all of the money to invest, you will need to earn more.

Factor #2 – Personal debt

Any credit card, even if left unused in your wallet, will impact how much you can borrow. It can make a big difference.

This is because the bank will assume the worst-case scenario.

Let’s say your credit card has a $10k limit. The bank will assess your mortgage application as if you have already maxed out your $10,000 card. Yes, even if you haven’t spent a cent.

They’ll then work out what you’d have to pay if you did max out your credit card, and look at your application as if you’ve already done this.

It’s the same with personal loans. The more repayments you have, the less income the bank thinks you have left to pay the new mortgage.

So if you don’t have credit cards or personal loans, you won’t need as much income to invest. But, if you you have lots of personal loans, hire purchases and credit cards, you’ll need to earn more to get started.

Factor #3 – Children

Kids are expensive. Parents know it, and so do banks.

That’s why having kids, either 1 or 10, will affect how much you can borrow.

For starters, if you’ve just had a child you may only have one income, or one of the parents may have gone down to part-time.

But even if you’ve managed to sidestep that, banks know it costs more to feed and house a growing family. So when they run the numbers they take those costs into account.

That means they’ll say you’ve got less money to pay a new mortgage, so they’ll lend you less money.

Factor #4 – High personal mortgage (lots of debt)

This is a bit of a no-brainer.

If you have a large mortgage, the bank will need you to have a higher income before they lend you more money.

If you don’t have a mortgage at all, you don’t spend as much money. Your expenses are lower, so you don’t need to earn as much.

For instance, a couple with 3 kids looking to purchase a $600k investment property will need an income of $100k with no personal mortgage.

But if they still have $500,000 left on their owner-occupier, that minimum income jumps to $153k

Factor #5 – Income split

It also matters how much each partner earns in your household (if you have a partner).

Let’s say you’ve got a couple with a household income of $200k.

We have a progressive tax system in New Zealand. This means you're at a disadvantage if one partner earns all the money.

Let's say 1 partner earns 200k, and the other partner isn’t earning. Maybe they’re at home with the kids.

The household will pay $58,120 a year in tax.

Now let’s change things up. If both partners earn $100k each, it’s the same household income ($200k). But together they’ll only pay $47,840 in tax.

So, the total take-home pay is over $10k higher. All because 2 people share the household income.

So if both partners earn a good income, sometimes you need less money to buy an investment property compared to one higher-income earner.

Why does the bank care about my income?

The bank needs to make sure you can afford a mortgage.

That’s why when you put in a mortgage application they calculate your Uncommitted Monthly Income (UMI).

Think of this as “spare cash”. They want to make sure that even after:

• They give you a mortgage
• And interest rates go up
• And you pay for all your household expenses
• And you pay all your loans
• And a few other things

… you still have money left over at the end of the month.

So, when considering your mortgage application, the bank runs a whole bunch of tests to see if you can afford it.

Rather than getting into the nitty gritty of how this works … here are some case studies that give an indication of how much you may need to earn.

Case study #1 – Parents Sarah and Jo

Parents Sarah and Jo want to buy their first investment. It’s a 2-bed, 1-bath townhouse in Christchurch advertised for $559k.

Between them they’ve got 2 kids, 2 cars and $300k left on the mortgage for their $600k house.

Sarah and Jo are pretty diligent with their money, so they’ve got a “clean situation”.

They have no credit cards, no hire purchases or “bubblegum debt”.

To buy that property they each need to earn $69k a year. That’s $138k together.

But what happens if they have a $10k credit card?

If they did, their borrowing power drops. They would then need to increase their incomes to $74k a year, each. That’s $148k together.

Case study #2 – Single rent-vester

Single man Simon wants to buy his first home. Not for himself to live in, but as his first investment property.

As a young man, it suits him to continue renting. He’s saved $108k, and he likes the idea of investing it in property.

The cheapest 2-bed, 1.5-bathroom townhouse in Christchurch will cost him $539k (on a good day).

He’s got no kids, 1 car, and is spending $350 a week on rent.

Simon will need to earn $91k a year. That’s if he's got a clean situation. This means no credit cards, and no hire purchases.

Case study #3 – Bobby and Caitlin

Career-focused couple Bobby and Caitlin are eyeing up their third investment property.

It’s a 3-bed, 2-bathroom townhouse in Mount Roskill, Auckland. It’s advertised for $895k and will rent for around $750 a week.

Here’s Bobby and Caitlin’s situation.

They’ve got no kids, 2 cars, and 3 properties.

• Property #1 – Own home. It’s worth $1m and has a mortgage of $650k (principal and interest)
• Property #2 – Investment property. It’s worth $800k and has a $700k mortgage (5 years interest-only)
• Property #3 – Investment property. It’s worth $650k and has a $350k mortgage (5 years interest-only)

They’ve also got:

• an unused credit card with a $20k limit
• A 40k car loan
• A student loan of 10k for Bobby

This is a more complicated situation. Bobby and Caitlin have a lot of debt.

They would need to earn $170k each to be able to buy their third investment property. That’s $340k together.

These case studies show how the amount of income you need depends on your personal situation.

So, how much income do I need to invest?

The amount of income you need depends on your situation.

Yes, it’s partly to do with how much you earn, but also your situation and how much debt you have.

This is why 2 people can earn the same income, but be approved for 2 different loan amounts.

If you want to get an understanding of how much income you need to invest, download our Investment Ready Spreadsheet here.

This will give you a sense of whether you can afford to invest and how far away you are from being able to purchase an investment.

But remember, these figures are a guideline. Always speak to a mortgage adviser about how much you can borrow to invest.