Does HECS affect home loans? I was chatting with a friend about this - the Higher Education Contribution Scheme/Higher Education Loan Program (HECS/HELP). She didn’t realise having a HECS/HELP debt could potentially reduce her borrowing power when applying for a home loan. A few days later, another friend told me they got a rude shock when they found out their borrowing power was reduced by almost $50,000 because of their HECS debt. As strange as it sounds, having a HECS/HELP debt from university can indeed potentially impact your borrowing power. This is because HECS repayments reduce your Net Disposable Income (NDI) and, in turn, your potential borrowing power - by up to thousands of dollars. Here’s everything you need to know about HECS-HELP debt affecting your home loan repayments or application.
The Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) is a loan offered by the Australian Government to pay for eligible tertiary education courses. The HECS/HELP debt does not accrue interest, but is indexed against the Consumer Price Index (CPI). HECS is payable when your taxable income reaches a certain threshold, which is currently around $48,400. Repayment rates vary depending on your income. The 2022-2023 rates can be found here. If your repayment income (including your pre-tax income plus super) is $70,000, for example, a repayment rate of 4% or $2800 applies. Repayment rate is based on your income, not the size of your HECS debt.
Borrowing power (sometimes called serviceability) is the maximum estimated loan amount you’re likely to be approved to borrow. Liabilities such as loan repayments, credit cards, and HECS/HELP repayments can impact your borrowing power. If you have a HECS/HELP liability and earn above the repayment threshold, repayments will be deducted from your income. Repayment amounts vary, but the deduction means you will have a lower net disposable income. The lower your NDI, the less money you can borrow. To get a better understanding of serviceability, let’s look at how lenders calculate your Net Disposable Income (NDI), which is what lenders base the former figure on.
[(Taxable Income - Tax Payable Incl. Medicare Levy)+ Non-Taxable Income] - Outgoings = NDI In the formula used above, ‘outgoings’ refers to expenses and includes your basic living expenses (i.e, like groceries and clothing) and non-basic living expenses (rent, entertainment, health insurance). Liabilities - including HECS/HELP debt repayments - can reduce your NDI and, therefore, borrowing power. The UNO borrowing power calculator can help you estimate your borrowing power.
Let’s look at an example. Jasmine wants to buy an apartment valued at $400,000. She has saved $50,000 for a deposit. Jasmine has a gross income of $80,000 including super - an estimated post-tax income of $4600 monthly*. Her estimated living expenses are $1,660. She has no other costs or liabilities. She can borrow between $426,000 and $530,000, according to UNO’s borrowing power calculator. But what if Jasmine has a HECS/HELP debt*? When making 5% HECS repayments, her estimated borrowing power drops to between $397,600 and $494,400 - a reduction of $28,000 and $36,000 respectively. This example is very specific. The result will be impacted by your individual circumstances and which lender you take a loan out with (each lender assesses HECS/HELP debt differently). Having said that, it does illustrate why you should be upfront with your broker about your current financial situation. I hope that you have found this helpful and that it may prevent the type of unpleasant surprise my friend was faced with.
HECS is referred to by many - including The Barefoot Investor, Scott Pape - as “the best loan you’ll ever get”. Increases to HECS are based on the consumer price index (CPI), which rose 7.8% in the 12 months to the December 2022 quarter. But with increases this high, you might be wondering whether to pay off your HECS/HELP loan or pay off your mortgage instead. The short answer is: there isn’t a ‘right’ answer - financial decisions depend on your personal circumstance and needs greatly. But there are some key considerations. HECS can impact your borrowing power and does technically compound over time, albeit slowly. But paying it is a potentially large sum that could have gone towards your house deposit, and HECS is waived upon death unlike a mortgage. Compared to other debts, HECS is also a flexible debt; if you lose your job, repayments can be ‘frozen’ unlike a phone bill or credit card. Other forms of debt could be costing you more; It’s important to consider other liabilities including credit cards, home loans, and personal loans and the interest these accrue. Amid recent RBA interest rate hikes, putting extra money towards your mortgage could help reduce further repayments. But you should always consider your personal financial situation before making a decision. Disclaimer: Advice in this article is general in nature and does not constitute financial advice. Always seek professional advice that considers your individual circumstances when making financial decisions.*Jasmine’s salary (gross income) is $80,000 (incl. super). Her estimated taxable income is $73,000 while her monthly post-tax income is estimated at $4,600. Using the Household Expenditure Measure (which lenders and brokers will calculate), her monthly living expenses are estimated to be $1,660. Jasmine has no other costs or liabilities, and she does not have any non-taxable income. Using the formula above, Jasmine’s NDI would be $3,020 a month or $36,300 – less than half her salary.**Based on the same input figures as the previous example and 2018-19 Repayment Threshold table 5%. Repayment = $3,652.97 a year ($304.41 per month), decreasing post-tax income to $4384.87. Reduced NDI is $2719.87 a month or $32,638.44. Numbers have been rounded to help readability.**Figures in this article have been rounded for readability (i.e, 426,244 to 426,400). They are for illustrative purposes only.