Does HECS-HELP debt affect your home loan borrowing power?

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HECS-HELP loans have eased the financial burden of attending university for thousands of Australians. But can taking on student debt hurt your chances when applying for a home loan

In short: absolutely. But there’s plenty you can do about it.

First of all, what is HECS-HELP?

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The Higher Education Contribution Scheme and Higher Education Loan Program (HECS-HELP, sometimes just shortened to HECS) is a government-backed lending scheme in Australia which loans eligible students money so they can attend university.

Am I charged interest on my HECS debt?

Good news: HECS-HELP is completely interest free. However, the amount is “indexed” every June, which means the Australian Taxation Office will adjust the value of the debt based on the Consumer Price Index (CPI). This makes sure the true value of the loan is kept accurate over the years and in line with the overall cost of living.

Curious what the index was this year? Thanks to inflation, unfortunately massive.

Does HECS debt affect how much I can borrow?

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Whenever you apply to borrow money, like a home loan, a prospective lender will evaluate your liabilities to see how much they can safely loan you. Liabilities are any financial obligations you may have, such as regular payments and debts. This includes expenses such as:

  • Dependent children
  • Higher education (student) debt.

The lender then will determine your serviceability by comparing your income against these debts. If they drain too much of your income, the lender will limit your borrowing capacity and restrict the size of your home loan.

In Australia, this means that your HECS-HELP debt will be taken into account while considering your home loan application.

Given that HECS repayments are tiered based on income, this is most likely to affect young or low-income home buyers the most. Without surplus cash to offset your risk, banks aren’t likely to lend you as much as you want. 

For example, let’s imagine a couple with a combined income of $100,000, no dependents and no credit cards, and only $1000 in monthly living expenses. They approach Commonwealth Bank for a loan with the following specifications:

  • 2.39% p.a. variable interest rate.
  • 20% deposit.
  • 25 year term.

If one partner earns $55,000 and has $30,000 owing on their HECS debt, they will be required to pay around $1,100 per year to the ATO. Since this is money that cannot go towards a monthly mortgage repayment, the lender will add the HECS debt to a list of the couple’s expenses.

With this HECS debt, the couple would only be able to borrow $645,700. Without it, however, their borrowing power goes up to $665,300 (an increase of almost $20,000). 

So if someone’s debt reality is any more complicated than this (and for most people, it absolutely is), they’d likely have to look for more budget-friendly properties. 

RELATED: What to do if the bank won't lend you as much as you want on your home loan

Do I have to declare HECS debt on my mortgage application?

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Absolutely. The bank will want to consider all your assets, debts, and liabilities – including your HECS-HELP debt – when assessing your home loan application. 

Keep in mind that it’s important to be brutally honest and upfront throughout the application process. This will not only protect you from negative consequences like losing out on your home loan, ending up on a ‘blacklist’, or being charged with fraud, but also safeguards your financial future. If you genuinely cannot afford repayments on the home loan size you want, then it’s better to avoid that long-term stress and risk in the first place.

How do I apply for a home loan with student debt?

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Photo by Honey Yanibel Minaya Cruz.

While it might not seem as urgent as other forms of debt, paying off student loans is a great way to get proactive about your finances and prepare for a home loan. After all, any debt you can pay off lessens your financial drag. 

RELATED: Want to ditch debt in 2022? Here's 6 top tricks

Aside from asking for a higher wage from your employer, there are a few things you can do to improve your borrowing capacity.

  • Live within your means by cutting any unnecessary expenses. Banks will especially look at anything you’ve purchased in the three months prior to your application, so make sure your statements are lean, mean, and squeaky clean.
  • Save for a bigger deposit, since that decreases your application’s loan-to-value ratio (LVR) and therefore lessens the perceived risk in the eyes of the bank. Consider setting an air-tight budget to get started.
  • Look at cheaper properties. It can suck to compromise a little on your dream home, but as they say: a bird in the hand. 
  • Use government grants. Depending on your circumstances, you may be eligible for one or more federal schemes to assist first home buyers. In particular, the First Home Owner Grant offers eligible borrowers a one-off lump sum, which varies in size depending on which state or territory you live in. This way, the government covers your shortfall and you’re able to get a crucial foot in the door – even with HECS debt. Ready to take the plunge? We’ve compiled a selection of competitive home loans on offer below.

Ready to take the plunge? We’ve compiled a selection of competitive home loans on offer below.

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