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Does a HECS-HELP debt affect your home loan application?

Having unpaid HECS or HELP debt probably won't derail your home loan application. But your lender will look at it and the debt will lower your borrowing power.

Will my HECS-HELP debt hurt my home loan application?

For most borrowers, having a HECS-HELP debt doesn't mean your home loan application will be rejected. Because repayments come out of your salary automatically (if you're earning above the income threshold), it doesn't affect your income in the way other debts do.

But your debt is factored into your debt-to-income ratio (DTI). That means your overall debt position relative to your annual gross income before tax. HECS-HELP debt can therefore limit your maximum borrowing capacity, even if it's unlikely to derail your whole application.

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The best debt you'll ever have. But...

Higher education loans like HECS and HELP don't come with interest charges, and are generally considered your least urgent debts.

Many borrowers (including this author) have no trouble getting their home loans approved despite having HECS-HELP debts. But there's no guarantee your lender won't ask you about your student debt. We've even heard cases where lenders demand applicants pay off their outstanding higher education debt before approving a loan.

You should seek personal financial advice before deciding to pay off a HECS-HELP debt early. And if you have other, interest-charging debts like personal loan or credit card debt, you should usually focus on those first.

How HECS-HELP debt affects your debt-to-income ratio

When you apply for a home loan your lender examines many things, including your income, assets, debts and expenses. Every lender has different methods for calculating how much you can safely borrow.

One important calculation is your DTI. Your DTI is calculated by dividing your total debts by your annual income. Here's a quick example:

  • You want to apply for a $400,000 home loan
  • You have $3,600 left on your car loan and a $10,000 HELP debt
  • You earn $100,000 a year and have no other income or debts
  • Your DTI calculated as $413,600 ÷ $100,000 = 4.136

Your DTI is therefore 4.136.

Recently the Australian Prudential Regulation Authority (APRA) informed the lenders it supervises that HECS-HELP debt must be considered when calculating a borrower's DTI. Prior to this clarification it seems some lenders were looking at these debts more closely than others.

🔥 Hot tip: Ask a lender about your HECS debt before you apply

Got a big HECS-HELP debt? Before you submit a full application for a home loan, you could ask your lender how much your outstanding debt will hurt your borrowing power.

Every lender has its own standards and lending criteria. Some may not care too much at all, while another lender may have a problem with it.

Mortgage brokers can also help you find a suitable lender in this scenario, as they have a good sense of different lenders' criteria.

How to improve your chances of home loan approval

If you're worried your HECS-HELP debt could hurt your home loan application or cut your borrowing power drastically, don't panic. There are steps you can take to minimise the effects of your HELP debt and potentially increase your borrowing capacity.

Paying off your least urgent debt (your no-interest HECS-HELP loan) is probably not the first thing you'd do.

Here are some tips to improve your borrowing position:

  • Pay off your your most urgent, high-interest debts first. Debts like credit card and personal loan debt are a bigger issue for most borrowers than HECS.
  • Take another look at your monthly spending and identify ways you can cut back. Ideally, cut back your spending in the months before your application.
  • Check your credit score before applying. HECS-HELP debt won't directly affect your credit score. But checking your credit score can help you identify any nasty surprises (or mistakes) in your credit report.
  • Be realistic about your borrowing capacity. The more you stretch your borrowing capacity the more your uni debt will start to weigh down your application.
  • Don't overapply. Every full loan application you submit is a mark on your credit score. That's why you only want to apply with one lender. If this lender rejects your application completely, then you have to apply somewhere else.

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