HECS-HELP loans have eased the financial burden of attending university for thousands of Australians. But can going into student debt hurt your chances when applying for a home loan?
In short: absolutely. But you can do a lot about it.
The Higher Education Contribution Scheme and Higher Education Loans Scheme (HECS-HELP, sometimes simply abbreviated as HECS) is a government-backed loan scheme in Australia that lends money to eligible students so that they can attend university.
Good news: HECS-HELP is completely pointless. However, the amount is “indexed” every June, meaning the Australian Taxation Office will adjust the value of the debt according to the Consumer Price Index (CPI). This ensures that the actual loan value is kept accurate over the years and in line with the overall cost of living.
Whenever you ask to borrow money, such as a home loan, a potential lender will assess your liabilities to see how much they can safely lend you. Liabilities are any financial obligations you may have, such as regular payments and debts. This includes expenses such as:
- Higher education debt (student).
The lender will then determine your utility by comparing your income to those debts. If they drain too much of your income, the lender will limit your ability to borrow and limit the amount of your home loan.
In Australia, this means that your HECS-HELP debt will be taken into account when considering your mortgage application.
Since HECS refunds are scaled by income, this is likely to affect young or low-income home buyers the most. Without excess cash to offset your risk, banks probably won’t lend you as much as you want.
For example, imagine a couple with a combined income of $100,000, no dependents and no credit card, and only $1,000 in monthly living expenses. They are approaching Commonwealth Bank for a loan with the following specifications:
- Variable interest rate of 2.39% per annum.
If a partner earns $55,000 and has $30,000 to pay on their HECS debt, they will have to pay around $1,100 per year to the ATO. Since this is money that cannot be used for monthly mortgage payments, the lender will add the HECS debt to a list of the couple’s expenses.
With that HECS debt, the couple could only borrow $645,700. Without it, however, their borrowing power jumps to $665,300 (an increase of almost $20,000).
So if the reality of someone’s debt is more complicated than that (and for most people it absolutely is), they’ll probably have to look for more budget-friendly properties.
RELATED: What to do if the bank does not lend you as much as you want on your home loan
Absoutely. The bank will want to consider all of your assets, debts, and liabilities — including your HECS-HELP debt — when evaluating your home loan application.
Keep in mind that it is important to be brutally honest and upfront throughout the application process. This will not only protect you from negative consequences such as losing your home loan, getting ‘blacklisted’ or being accused of fraud, but will also protect your financial future. If you really can’t afford to repay the mortgage amount you want, it’s best to avoid that long-term stress and risk in the first place.
While it may not seem as urgent as other forms of debt, paying off student loans is a great way to be proactive about your finances and prepare for a home loan. After all, any debt you can pay off reduces your financial drag.
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In addition to asking your employer for a higher salary, there are things you can do to improve your borrowing capacity.
- Live within your means by reducing unnecessary expenses. Banks will especially look at anything you bought in the three months before you applied, so make sure your statements are lean, nasty and spotless.
- Save for a larger depositsince it decreases the performance of your application loan-to-value (LVR) ratio and therefore lowers perceived risk in the eyes of the bank. Consider setting a tight budget to start with.
- Look at cheaper properties. It may suck to compromise a little on your dream home, but as they say: a bird in the hand.
- Use government grants. Depending on your situation, you may be eligible for one or more federal first-time homebuyer assistance programs. In particular, the First Home Owner Grant offers eligible borrowers a one-time lump sum, which varies in size depending on the state or territory in which you live. This way the government covers your shortfall and you can get a crucial foot in the door – even with HECS debt. Ready to take the plunge? We have compiled a selection of competitive home loans on offer below.
Ready to take the plunge? We have compiled a selection of competitive home loans on offer below.
* ATTENTION: This comparison rate only applies to the example or examples given. Different amounts and durations will result in different comparison rates. Costs such as withdrawal charges or prepayment charges, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate shown is for a secured loan with monthly principal and interest repayments of $150,000 over 25 years.
** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on the amount of your loan, the term of the loan and your credit history. Actual repayments will depend on your personal circumstances and changes in interest rates.
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