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If you’re a university graduate, it’s likely that you’ve accumulated a debt as part of the Higher Education Contribution Scheme (HECS) during your tertiary studies. Many students choose to defer payment of their tertiary education through this higher education loan program with the intention of paying the government back once they start working.
Your higher education debt may have been a non-issue during your course when you were darting in and out of lectures, but you have to face the music once you enter the workforce and reach a certain income threshold.
In essence, a HECS/HELP debt is treated like any other liability during a home loan application. Because it reduces your income, your serviceability potential and borrowing capacity is lowered, which increases your risk profile.
However, there are steps you can take to raise your chance of qualifying for finance.
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When you apply for a home loan, the lender will ask you to disclose information about your liabilities, including the number of dependents that you have, poor credit ratings as well as any other debts. This is where your HECS/HELP debt comes in.
If you’ve decided to defer part or all of your HECS/HELP payment, then you normally aren’t required to start repaying the debt until your annual taxable income is $51,309 or greater.
Once you reach this threshold, your employer will withhold 4% of your taxable income, which will be directed towards your HECS/HELP debt. The amount of withheld salary will increase once you start earning $77,248 or more.
Data from the Australian Scholarship Group (ASG) indicates that an average four-year bachelor degree ranges from $18,000 and $30,000, depending on the institution. This is a hefty debt, which can reduce your home loan serviceability potential.
As a result, the lender will review this debt carefully (just like other personal liabilities such as credit cards or number of dependents) when deciding whether or not you’re in a sound financial position to repay the loan.
As stated above, HECS debt payments are withheld from your taxable income starting at a rate of 4% once you hit the annual taxable income threshold $51,309, and rising to a maximum of 8% once your income reaches $77,248 or more.
Because HECS debt effectively reduces your income, it also reduces your borrowing power. And the amount by which it reduces your borrowing power can be significant. Take a look at the figures below:
As you can see from finder.com.au's Borrowing Power Calculator, an income of $100,000 with no other debts would allow you to borrow approximately $664,000.
Now if HECS debt were to effectively reduce that income by 8%, it's clear below how borrowing power would be impacted.
As you can see, borrowing power has been reduced by $56,000.
Obviously, the example above is a slight simplification. Different lenders may have different criteria by which they assess HECS debt, and its impact on your borrowing power will vary depending on your income and the size of your HECS debt. However, regardless of how lenders choose to treat it, HECS debt will have an impact on your borrowing power.
HECS debt in general is an inexpensive debt, as it doesn't accrue interest but is instead indexed against inflation. Always seek expert advice, but in general, unless you believe your HECS debt will disqualify you for a home loan or drastically reduce your borrowing power, it's usually more effective to devote extra funds toward paying off higher interest debt such as credit cards, car loans or personal loans.
Having a HECS/HELP debt can negatively affect your ability to qualify for a loan, so here are some ways you can improve your chance of qualifying:
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