Does HECS-HELP Debt Affect Home Loan Applications?

How HECS/HELP Debt Can Impact Your Home Loan Application

Does HECS affect home loans? I was recently chatting with a friend about the Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP), and she was surprised to learn that her HECS/HELP debt could potentially reduce her borrowing power when applying for a home loan. A few days later, another friend told me about the rude shock they experienced when they found out their borrowing power had been reduced by nearly $50,000 due to their HECS debt.

As strange as it may seem, having a HECS/HELP debt from university can indeed impact your borrowing power. This is because HECS repayments reduce your Net Disposable Income (NDI), which, in turn, can limit the amount you’re eligible to borrow—sometimes by thousands of dollars. Here’s everything you need to know about how HECS/HELP debt might affect your home loan application.

Does HECS/HELP Affect Your Home Loan Application?

If you’re wondering if a HECS/HELP debt affects home loan applications, the answer is yes—it can. HECS/HELP debt may not have interest, but it does reduce your NDI. Since lenders use NDI to determine your borrowing power, HECS repayments can reduce the amount you qualify to borrow by thousands of dollars. This might come as a shock to many people who assume that because it’s an education debt, it wouldn’t impact their ability to borrow for a home.

Understanding HECS/HELP Debt

HECS/HELP debt is a loan provided by the Australian Government to help students pay for eligible tertiary education courses. It’s a unique type of debt because it doesn’t accrue interest. Instead, it’s indexed annually according to the Consumer Price Index (CPI). Repayment begins once your income reaches a specific threshold, currently around $54,435. The amount you repay is based on your income, not the total HECS debt, with repayment rates varying depending on income brackets.

How Does HECS/HELP Debt Affect Your Borrowing Power?

Borrowing power, also known as serviceability, is the estimated maximum loan amount that lenders assess you can borrow. Lenders consider your income, liabilities, and outgoings when calculating your borrowing power.

If you’re earning above the HECS repayment threshold, lenders will factor these repayments into your liabilities, lowering your overall NDI and, consequently, the loan amount you can access. For instance, a reduction of $50,000 in borrowing power due to HECS debt is not uncommon.

To understand how your NDI is calculated, take a look at this simplified formula:

[(Taxable Income - Tax Payable Incl. Medicare Levy)+ Non-Taxable Income] - Outgoings = NDI

In this equation:

• Outgoings refer to expenses, including basic living expenses like groceries, rent, utilities, and non-basic expenses like entertainment and insurance.
• Liabilities cover any regular debts or obligations, including HECS repayments.

Since your HECS debt repayments reduce your monthly income available for other debts, they impact the NDI lenders see, ultimately affecting your borrowing power.

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Example: Jasmine’s Borrowing Power with HECS Debt

Consider Jasmine, who earns a gross annual income of $80,000 including super. She has saved $50,000 for a home deposit. Without a HECS debt, Jasmine could potentially borrow between $437,000 and $618,000*, based on her income and estimated living expenses. However, if Jasmine has a HECS/HELP debt and needs to make 3% repayments, her borrowing power might drop to between $413,400 and $601,000**. This represents a decrease of around $17,000 to $23,600, depending on the lender’s criteria.

TThis example highlights how HECS/HELP debt can influence borrowing power significantly. Each lender may have unique assessment criteria, so it’s essential to be transparent with your broker about your financial situation. By understanding your borrowing limits upfront, you can avoid unexpected setbacks in the loan application process.

Should You Prioritise Paying Off HECS or Other Debts?

With recent CPI increases—such as the 7.8% rise in the 12 months leading up to December 2022—it’s natural to wonder if prioritising HECS/HELP debt repayments over other financial obligations might be beneficial. Here are some key factors to consider:

• HECS Debt Flexibility: HECS debt doesn’t accrue traditional interest but instead grows at a rate aligned with inflation. This generally makes it a comparatively low-cost liability, as it only increases by the Consumer Price Index (CPI).
• HECS is Waived Upon Death: Unlike other personal debts, HECS is waived if the debtor passes away, which can reduce financial burdens on family members or estate obligations.
• Income-Driven Repayments: HECS repayments adjust based on income, so if your income decreases, your HECS obligations will also reduce. This income-driven structure can be helpful if your financial situation changes.
• Prioritising Higher-Interest Debts: For many, it’s financially advantageous to focus on repaying higher-interest debts, such as credit cards or personal loans, which tend to accrue more costly interest over time. Given recent Reserve Bank of Australia (RBA) rate increases, paying down these higher-interest obligations might offer immediate financial benefits.

Ultimately, whether you should focus on paying down your HECS debt or your mortgage is a personal decision based on your financial goals, income, and risk tolerance. Some people may benefit from reducing their HECS debt first to increase their borrowing power, while others might prioritise mortgage repayments to reduce interest costs.

Tips for Managing HECS/HELP Debt When Applying for a Home Loan

If you’re thinking of applying for a home loan and have HECS debt, here are some strategies to consider:

1. Be Transparent with Your Broker: Discuss your HECS/HELP debt with your mortgage broker upfront. They can guide you to lenders who assess HECS liabilities more favourably.
2. Use Plans by UNO: Tools like Plans, by UNO can help you estimate how much you might be eligible to borrow, taking your HECS repayments into account.
3. Evaluate Other Debts: Consider reducing other high-interest debts or outgoings before applying for a loan, which may give you more flexibility with lenders.
4. Seek Professional Advice: Given the complexity of borrowing power calculations, consulting with a financial adviser can be invaluable. They can provide you with tailored advice based on your circumstances and goals.

For personalised advice on your options, contact a UNO broker today.

Disclaimer: The information in this article is general in nature and should not be considered financial advice. Always consult a financial professional for guidance tailored to your personal situation.

_{*Jasmine’s salary (gross income) is $80,000 (incl. super). Her estimated taxable income is $71,749while her monthly post-tax income is estimated at $4,831. Using the Household Expenditure Measure (which lenders and brokers will calculate), her monthly living expenses are estimated to be $2,002 (this may vary depending on the lender as each lender calculates HEM slightly differently). 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 $2,829 a month or $33,972 – approximately 59% of her salary.}

_{**Based on the same input figures as the previous example and 2024-25 Repayment Threshold table 3%. Repayment = $2,152 a year ($179 per month), decreasing post-tax income to $4652 a month. The reduced NDI is $2650 a month or $31,800 per year. Numbers have been rounded to help readability.}

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Source: Australian Tax Office