What is HECS-HELP?
HECS-HELP is a student loan program offered by the government to assist Australian students who can’t afford to pay upfront for the costs of university or higher education.
A HECS (Higher Education Contribution Scheme) loan can cover fees for courses, tutorials, sporting activities, legal responsibilities and other costs associated with university.
Although HECS debt is indexed annually to keep up with the cost of living, no interest is applied to the loan.
Once the borrower reaches a certain income threshold, automatic HECS repayments are put in place to deduct a portion of that person’s wage. You can click here to see how the current repayment thresholds apply to your income.
Will my HECS debt affect my home loan application?
The simple answer to this question is yes, your HECS debt will affect your home loan application. Unfortunately, most lenders regard HECS the same as any other kind of liability.
When applying for a home loan, lenders run what’s known as a “serviceability” test to determine your capacity to service your liabilities and expenses.
Through this process, the lender will ask you to disclose your credit score, liabilities and other important financial information. This is when you will need to inform the lender of your HECS loan.
The bank is ultimately interested in how much surplus income you have each month. Although most lenders won’t factor HECS into your total debt exposure, they will consider the deduction from your income.
Under HECS’ repayment structure, high income earners can be paying upwards of $1000 towards their student loan each month. This can be a deciding factor when calculating whether you will still be reaching a surplus on the loan that you are after.
It is important to note; HECS debt shouldn't affect your credit score and doesn’t mean you won’t be able to get a home loan. It just means that because your HECS debt reduces some of your earning power, it is likely the curb the amount you are able to borrow.
The bottom line is that each bank uses their own serviceability calculation and views HECS debt differently. Your HECS is simply another consideration the bank will take on board when deciding your capacity to make the repayments on a loan.
Is it better to pay off your HECS debt or your mortgage repayments?
The answer to this question will depend on your individual circumstances and financial goals.
Although paying down your HECS debt will increase your earning capacity in the eyes of a lender, it will likely mean you have less money for a deposit.
If you have a large HECS debt with only a small deposit saved up, paying down your remaining HECS balance is unlikely help your home loan application. Doing this could raise your loan-to-value (LVR) ratio above the (usually) required 80%, as well as increase the interest you pay over the course of your loan. Additionally, if you’re forced to pay Lenders Mortgage Insurance to the compensate for the smaller deposit, the costs can far away the benefits of paying down your HECS.
Typically, the instances where we recommend a client pays off their student loan is when they have a relatively small HECS debt remaining and a healthy deposit saved. In this instance, boosting your surplus may be the best way to get approved for a bigger loan.
Due to HECS debt not incurring interest (apart from indexation), investing the money in the short term is often a more effective use of your savings.
How else can I improve my borrowing power with a HECS debt?
Outside of paying down your remaining HECS, there are several other solutions to help your home loan application.
1. Take out a smaller loan
If your HECS debt is affecting your ability to take out a desired loan amount, perhaps the most practical solution is to set your sights a bit lower.
While it’s tough when have your heart set on a home, this is often the unfortunate reality of borrowing in today’s property market.
Buying a dream house that you can’t afford may end up being at the expense of your personal and financial wellbeing.
2. Save for a bigger deposit
If you’re hesitant to compromise on the value of a loan, another solution is to give yourself more time to build a deposit.
Obviously, the more money you have for a deposit, the less you will need to borrow and the better your chances are at home loan approval.
However, this strategy can be a double-edged sword. With property prices trending upwards over time, holding off to build a deposit can mean you end up needing to take out a bigger loan anyway.
3. Utilise the first home buyer schemes available
If you have a HECS debt and are looking to buy your first property, you may be eligible for a government grant or scheme which can help your situation.
These initiatives are in place to help young Australians break into the property market sooner by assisting the home loan application process.
In Victoria, the most beneficial initiatives include:
- First Home Buyer’s Grant
- First Home Super Saver Scheme
- Stamp duty concessions
- First Home Loan Deposit Scheme
For further information about these schemes, you can check out our blog here.
4. Speak to your mortgage broker
If you’re still confused and have access to a good mortgage broker; use them.
Your mortgage broker will help you understand your borrowing capacity and which lenders look more favourably towards HECS debt.
From here, they can break down your home loans options and help you plan the best course of action for your situation.
To speak to a qualified mortgage broker, you can contact Elephant Advisory's finance team here.