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 youâre eligible to borrowâsometimes by thousands of dollars. Hereâs everything you need to know about how HECS/HELP debt might affect your home loan application.
If youâre wondering if a HECS/HELP debt affects home loan applications, the answer is yesâit 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 itâs an education debt, it wouldnât impact their ability to borrow for a home.
HECS/HELP debt is a loan provided by the Australian Government to help students pay for eligible tertiary education courses. Itâs a unique type of debt because it doesnât accrue interest. Instead, itâs 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.
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 youâre 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:
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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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 lenderâs criteria.
TThis example highlights how HECS/HELP debt can influence borrowing power significantly. Each lender may have unique assessment criteria, so itâs 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.
With recent CPI increasesâsuch as the 7.8% rise in the 12 months leading up to December 2022âitâs natural to wonder if prioritising HECS/HELP debt repayments over other financial obligations might be beneficial. Here are some key factors to consider:
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.
If youâre thinking of applying for a home loan and have HECS debt, here are some strategies to consider:
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.
*Jasmineâs 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, Jasmineâs NDI would be $2,829 a month or $33,972 â 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:Â Australian Tax Office