What a HECS/HELP debt means for your home loan application

A HECS debt can significantly reduce your income and serviceability potential. Find out how you can improve your chance of qualifying for a home loan.

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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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How can a HECS debt affect my chance of qualifying for a loan?

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.

How can a HECS debt affect my borrowing power?

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:

Screen Shot 2016-07-12 at 4.39.03 PM
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.

Screen Shot 2016-07-12 at 4.45.20 PM

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.

Should I pay off my HECS debt?

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.


How can I improve my chance of qualifying?

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:

  • Request credit file. Before applying for a home loan, you should order a copy of your credit file to understand your financial position. Reviewing your credit file can help you understand how you will be perceived as a borrower and whether you need to take any steps to improve your credit status.
  • Reduce existing debt. If you have several debts such as personal loans or credit cards, you may want to consider consolidating them to benefit from a lower interest rate. However, be careful about combining short-term debt with long-term debt due to the variation in loan terms. For instance, if you took out a $10,000 personal loan at 14.5% interest over five years, you would have monthly repayments of $235 and total interest payable of $4,117. However, if you decided to consolidate this debt into your mortgage over 30 years (even at an average interest rate of 4.5%), the total interest payable on this portion of the loan would be significantly higher, as it’s extended over a longer term.
  • Evidence of savings. As a HECS/HELP debt greatly reduces your income and serviceability potential, you should be proactive about demonstrating that you have a good savings record. This can be done by making regular deposits into a high-interest savings account, as it shows the lender that you have financial discipline.
  • Speak to a broker. A licensed mortgage broker can help you understand your home loan options and your borrowing capacity. Mortgage brokers have expert knowledge of the home loan industry and can help you find a specialist lender that may be more likely to approve your application despite your HECS/HELP debt. A broker can also help you complete the paperwork and negotiate a competitive rate on your behalf.
  • Be candid. When you approach a broker or lender, you need to be honest about your financial position. This means you need to disclose all details regarding your assets and liabilities, including your HECS/HELP debt. If you omit this from conversations, you risk applying for the wrong home loan product, defaulting on your home loan or potentially experiencing mortgage stress.
  • Be conservative. It’s important to be conservative when estimating your income, assets and liabilities. For instance, don’t include superannuation in your base salary, and ensure that your property has been recently and independently valued. Don’t overlook expenses such as childcare costs.
  • Don't overapply. Be selective about the home loans you apply for. Each time you apply for a home loan, your lender will review your credit rating. When this happens, it shows up on your credit file. As the lender cannot see the outcome of previous enquiries on your credit file, it may be assumed that you’ve been rejected for several home loan applications. This is a red flag in the lender’s point of view. Thus, applying for several loans at once can harm your ability to qualify for a loan.

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St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)
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80%
Refinancers borrowing $250,000 or more can get a $4,000 cashback (Other terms, conditions and exclusions apply). A low variable interest rate for home buyers and refinancers. Application fee waived for loans above $150,000.
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Athena Variable Home Loan - Owner Occupier, P&I
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Owner occupiers can get one of the lowest rates in the market with this variable rate mortgage. $0 application fee and $0 ongoing fees.
Bank of Melbourne Basic Home Loan - Special Offer (Owner Occupiers, P&I) LVR above 60% up to 80%
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90%
Refinancers borrowing $250,000 or more can get a $4,000 cashback (Other terms, conditions and exclusions apply). Buyers and refinancers can get this competitive variable interest rate. A low variable interest rate for home buyers and refinancers. Application fee waived for loans above $150,000.
Bankwest Complete Home Loan Package Variable - $200k+ LVR <=80% (Owner Occupier, P&I)
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Macquarie Bank Basic Home Loan - LVR ≤ 80% (Owner Occupier, P&I)
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State Custodians Low Rate Home Loan with Offset - LVR up to 70% (Owner Occupier, P&I)
2.83%
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Greater Bank Great Rate Home Loan - Discounted 2 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
2.89%
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Macquarie Bank Offset Home Loan Package - LVR ≤ 80% (Owner Occupier, P&I)
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loans.com.au Essentials - Variable (Owner Occupier, P&I)
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Virgin Reward Me Variable Home Loan - LVR <= 80% ($500k to $750k Owner Occupier, P&I)
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UBank UHomeLoan - 3 Year Fixed Rate (Owner Occupier, P&I)
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A competitive fixed interest rate loan with no ongoing fees. Requires a 20% deposit.
Greater Bank Great Rate Home Loan - Discounted 3 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
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Pepper Money Essential Prime Full Doc Home Loan - LVR >75% up to 80%
3.59%
3.79%
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$10 monthly ($120 p.a.)
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Virgin Reward Me Fixed Rate Home Loan - 3 Year $300k+ Special offer (Owner Occupier, P&I)
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ING Orange Advantage Loan - $150k to $500k (LVR <=80% Investor, P&I)
3.49%
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$299 p.a.
80%
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Athena Variable Home Loan - Investor, P&I
3.24%
3.20%
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$0 p.a.
80%
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State Custodians Low Rate LOC - LVR up to 80% (Owner Occupier, IO)
3.15%
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A low-fee line of credit loan from an online lender. Unlock the equity in your home and make interest-only repayments with a competitive rate. This loan is not available for construction.
Gateway Bank Low Rate Essentials Variable Rate Home Loan - Special offer LVR up to 80% and over $500k (Investor, P&I)
3.29%
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UBank UHomeLoan - 1 Year Fixed Rate (Investor, P&I)
2.89%
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$395
$0 p.a.
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Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
Virgin Reward Me Variable Home Loan - LVR <= 80% ($500k to $750k Investor, P&I)
3.44%
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$10 monthly ($120 p.a.)
80%
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Adelaide Bank SmartFix Home Loan - 2 Year Fixed Rate (Owner Occupier, IO)
3.59%
3.37%
$375
$15 monthly ($180 p.a.)
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Home buyers with a 20% deposit can get this low interest-only rate. It also comes with a 100% offset account.
Virgin Reward Me Variable Home Loan - LVR <=80% ($500k to $750k Owner Occupier, IO)
3.74%
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A variable rate home loan with no application fees.

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