If you’re a student in Australia, you’ve probably heard about the Higher Education Contribution Scheme (HECS) and the Higher Education Loan Program (HELP). Collectively referred to as HECS-HELP, this Australian government initiative provides loans to students to support their education. However, you may wonder how these loans can impact your future, specifically your ability to borrow money for buying a home.
Understanding HECS-HELP loans and repayments
HECS-HELP loans are different from most personal loans. While personal loans usually have a set term by which you must pay back the loan in full, a HECS-HELP debt does not have an end date. Repayment only begins once your income reaches a certain threshold, which as of the 2022-2023 financial year, is an annual income of $48,361. The repayment amount is then tiered based on your income; the higher your income, the higher the repayment rate.
Why is HECS-HELP becoming a problem
According to the National Tertiary Education Union, the average student is now $24,770 in debt, up from $15,191 in 2012, taking on average nearly a decade to pay it off.
Business Management Degrees could take 44 years to repay at a cost of $119,331, while a Humanities and Social Sciences Honours degree could take 40 years at $110,353.
How HECS-HELP debt affects home loan borrowing power
Analysis from personal finance marketplace company Compare Club has revealed HECS-HELP debt will, on average, cut $15,000 from a graduate’s borrowing power.
While it’s natural to worry about how your student loans might affect your borrowing power for a home loan, rest assured: lenders don’t base their decision solely on your student loans. In fact, HECS-HELP debt is a poor indicator of your financial situation and money management, which lenders are more interested in.
While your HECS-HELP debt will be factored into your debt-to-income ratio (DTI), it’s far less obtrusive to your borrowing power than credit card debt or defaulted loans. However, it might cap your borrowing capacity, which limits the loan amount you can take out.
Boosting borrowing power despite HECS-HELP debt
Having a HECS-HELP debt doesn’t mean your dream of owning a home is over. Indeed, working on improving your credit score and reducing other existing debt should be a priority, as these factors have a greater impact on your borrowing power and home loan approval chances than your HECS-HELP debt.
Keep in mind that a lack of HECS-HELP debt and a strong credit score puts you in a more favourable position for a lower interest rate when assessed in a risk-based model. However, it’s important to consider the comparison rate rather than the headline fixed or variable rate, as the comparison rate factors into the regular fees you’ll pay.
In conclusion, while HECS-HELP debt can have some impact on your home loan borrowing power, it doesn’t define it. Lenders consider many factors when assessing risk, and it’s essential to manage your overall financial health to maximise your borrowing power. If you want any help in negotiating your borrowing capacity please reach out to the Inspired Money team who are more than happy to take you through the process and help ease your mind in what’s becoming a complex situation.
This article was written by our Head of Mortgage Lending Services Darrel Roberts and provides general information that should not be considered personalised financial advice. If you have specific questions or concerns book a session to review your current mortgage situation or any other lending issue contact Darrel directly on 08 6222 7909 or book a meeting now via his booking page.