The Impact of HECS-HELP Debt on your Borrowing Power
7 min read
Higher Education Contribution Scheme (HECS–HELP) debt is a reality for many Australians who have pursued higher education. While it provides an accessible way to fund your studies, it’s often overlooked when planning major financial decisions like buying a home. Unlike other types of debt, HECS–HELP repayments are income-contingent, which means they may not feel as burdensome day-to-day.
It’s important to note that when it comes to borrowing for a home loan, lenders will factor HECS-HELP into their assessment of your debt. In this blog, we’ll explore how HECS–HELP debt can influence your ability to secure a loan and what you can do to navigate this challenge effectively.
Understanding HECS-HELP Debt
HECS–HELP is a government loan designed to help Australians afford tertiary education. It allows eligible students to defer their tuition fees until they reach a certain income threshold, making higher education more accessible.
Unlike traditional loans, HECS–HELP repayments are income-contingent. This means you don’t need to start repaying your debt until your income exceeds a set threshold, which is reviewed annually. Once you earn above this threshold, the tax system automatically deducts a percentage of your income.
You can view current thresholds via the ATO website here.
HECS–HELP debt doesn’t accrue interest like a typical loan; instead, it’s indexed annually to inflation. As an aside, this is great when CPI is low, but it can be challenging in a higher inflationary environment like we’ve been experiencing recently. Additionally, HECS–HELP debt doesn’t appear on your credit file. However, lenders still need to treat it as a financial obligation when assessing your capacity to borrow, which can influence how much you can afford to repay on a home loan.
How HECS-HELP Debts Affect Your Borrowing Power
HECS–HELP might feel invisible in your day-to-day life, but when it comes to borrowing, it plays a role. Lenders view HECS–HELP as a financial commitment, which can limit your borrowing capacity as your repayments are factored into your expenses. Here’s how it impacts your ability to secure a home loan:
HECS-HELP Repayments as Financial Obligations
Lenders treat HECS–HELP repayments as part of your regular expenses, reducing the income available for loan repayments.
Reduced Borrowing Capacity
Higher HECS–HELP repayments leave less disposable income for a mortgage, limiting the loan amount you qualify for.
Factors Determining the Impact
When it comes to your HECS-HELP debt, there are several factors that influence the extent to which your borrowing capacity will be affected.
Income Level
The more you earn, the higher your HECS–HELP repayment will be. This can significantly reduce your disposable income, affecting loan eligibility.
Loan Size & Term
Larger HECS–HELP debts result in higher compulsory repayments once your income exceeds the threshold, which can reduce your borrowing power. Since lenders factor in these repayments when assessing your financial commitments, they may limit the amount you can borrow.
Lender Policies
Different lenders assess HECS–HELP debts differently. Some may apply stricter criteria, while others are more flexible.
Strategies to Minimise the Impact of HECS-HELP
HECS-HELP debt may reduce your borrowing power, but there are proactive steps you can take to manage its impact. By planning carefully and exploring your options, you can optimise your financial position and improve your chances of securing a home loan. Here are some strategies to consider:
Increase your Income
Boosting your income through career advancement or additional work can improve your borrowing capacity by offsetting HECS-HELP repayments.
Pay Down HECS-HELP Debt
Making voluntary repayments can reduce your HECS-HELP balance, lowering your repayment obligations and freeing up income for a mortgage.
Choosing the Right Lender
Different lenders assess HECS–HELP debt differently. Work with a mortgage broker to help find a lender with favourable policies for borrowers with HECS–HELP.
Focus on Budgeting
Streamline your expenses and reduce other debts to improve your overall financial position and borrowing power.
Should You Pay Off HECS-HELP Before Borrowing?
Paying off HECS–HELP debt before applying for a home loan can improve your borrowing power by reducing financial obligations and increasing disposable income.
However, paying off HECS–HELP early isn’t always necessary. HECS–HELP debt is indexed to inflation, making it relatively low-cost compared to other forms of debt. Using your savings for a larger deposit may reduce your loan-to-value ratio (LVR) and help you avoid costly lender mortgage insurance (LMI). The balance and repayments of your HECS-HELP debt should be considered too, as it may not have a very big impact on your lending overall.
Your decision should depend on your financial situation. If you have a high income and significant HECS–HELP repayments, reducing the debt could be beneficial. On the other hand, some lenders are more lenient with HECS-HELP debt, so paying it off may not be necessary.
Tips for First-Time Borrowers with HECS-HELP Debt
Managing HECS–HELP debt while trying to secure your first home loan may seem challenging, but it’s entirely possible with the right approach. By planning and adopting smart financial habits, you can minimise the impact of HECS–HELP on your borrowing power and make your home ownership dreams a reality.
- Budget Wisely: Track your income and expenses, accounting for HECS-HELP repayments. Reduce unnecessary spending and save consistently for your deposit.
- Pay off other debts: Prioritise clearing higher-interest debts like credit cards or personal loans to improve your overall financial profile.
- Work with a broker: A broker can help you find lenders with more favourable policies for HECS-HELP debt and tailor solutions to your situation.
- Strengthen your credit profile: Make all payments on time, reduce credit card limits, and demonstrate financial responsibility to boost your credit.
Taking these steps can help you balance your HECS–HELP debt with your goal of owning a home. With preparation and the right advice, you can navigate the process confidently.
HECS–HELP debt affects your borrowing power, but it doesn’t have to stop you from achieving your homeownership dreams. With smart budgeting, managing other debts, and expert guidance, you can navigate the challenges effectively.
If you’re ready to take the next step, Entourage is here to help. Our team of experts can guide you through the process, find lenders that fit your needs, and help you secure the best financial solution. Contact us today to get started!