HECS-HELP Debt and Your Home Loan: What You Need to Know
For many Australians, a Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) debt is a common part of their financial landscape. While these government loans provide invaluable support for tertiary education, they can also impact your ability to secure a home loan. This comprehensive guide will explore how HECS-HELP debt affects your borrowing power and provide strategies to navigate the home loan application process successfully.
Understanding HECS-HELP Debt
HECS-HELP is a government scheme that helps eligible students cover their university course fees. Unlike traditional loans, HECS-HELP debt doesn’t accrue interest. However, it is indexed annually to align with the Consumer Price Index (CPI), ensuring the debt’s value keeps pace with inflation.
According to recent Australian Taxation Office (ATO) data, more than 3 million Australians owe a combined $68.7 billion in HECS-HELP debt. With such widespread impact, it’s crucial to understand how this debt affects your financial future, particularly when applying for a home loan.
How HECS-HELP Debt Impacts Home Loan Applications
While having a HECS-HELP debt won’t automatically disqualify you from obtaining a home loan, it does influence your borrowing capacity. Here’s how:
1. Debt-to-Income Ratio
Lenders use your debt-to-income ratio to assess your ability to service a loan. HECS-HELP debt is factored into this calculation, potentially reducing the amount you can borrow.
2. Reduced Net Income
HECS-HELP repayments are deducted from your salary once you reach the income threshold. This reduction in take-home pay affects the amount lenders believe you can comfortably repay on a home loan.
3. Serviceability Assessment
Lenders will consider your ongoing HECS-HELP repayments when assessing your ability to meet potential mortgage repayments.
Strategies for Managing HECS-HELP Debt When Applying for a Home Loan
While HECS-HELP debt can impact your borrowing power, there are several strategies you can employ to improve your position:
1. Know Your Exact HECS-HELP Debt Balance
Before applying for a home loan, it’s crucial to understand your current HECS-HELP debt balance. You can check this by:
- Logging into your HECS-HELP portal
- Accessing your myGov account
- Contacting the ATO on 1300 650 225
Knowing your exact balance allows you to provide accurate information to lenders and helps you make informed decisions about managing your debt.
2. Reduce Other Existing Debts
While your HECS-HELP debt is important, lenders are often more concerned about other types of debt, such as credit cards or personal loans. Focus on reducing these debts to improve your overall financial position and borrowing capacity.
3. Save for a Larger Deposit
A larger deposit can offset the impact of your HECS-HELP debt on your borrowing power. Aim to save at least 20% of the property’s value to avoid Lenders Mortgage Insurance (LMI) and demonstrate strong financial management skills to potential lenders.
4. Consider Additional Income Streams
Increasing your income through part-time work or passive income sources can help you manage your HECS-HELP repayments more effectively and improve your borrowing capacity.
5. Explore Government Grants and Incentives
Even with HECS-HELP debt, you may be eligible for various government assistance programs for home buyers. Research options such as the First Home Owner Grant or the First Home Loan Deposit Scheme to see if you qualify.
6. Seek Professional Advice
Consult with a mortgage broker or financial advisor who can provide tailored advice based on your specific situation. They can help you understand how your HECS-HELP debt impacts your borrowing power and suggest strategies to improve your position.
Should You Pay Off Your HECS-HELP Debt Before Applying for a Home Loan?
The decision to pay off your HECS-HELP debt before applying for a home loan depends on your individual circumstances. Consider the following:
- If you have significant savings, paying off your HECS-HELP debt could improve your borrowing capacity.
- However, using all your savings to clear HECS-HELP debt might leave you short for a home deposit.
- Remember, HECS-HELP debt is interest-free (though indexed), making it less urgent to repay compared to other forms of debt.
Consult with a financial advisor to determine the best approach for your situation.
Recent CPI Figures and Their Impact on HECS-HELP Debt
It’s important to be aware of how CPI changes affect your HECS-HELP debt. For 2024, the expected indexation rate is set at 4.7%. This means that even if you make repayments, your total loan amount will increase by this percentage.
For example, if your HECS-HELP balance in June 2024 was $25,000, it would increase by $1,175 on 1 July 2024, totalling $26,175.
While seeing your loan balance increase can be disheartening, remember that HECS-HELP repayments themselves are interest-free.
While HECS-HELP debt can impact your home loan application, it doesn’t have to be a roadblock to homeownership. By understanding how this debt affects your borrowing power and implementing strategies to manage it effectively, you can improve your chances of securing a home loan.
Remember to:
- Know your exact HECS-HELP debt balance
- Focus on reducing other debts
- Save for a larger deposit
- Consider additional income streams
- Explore government assistance programs
- Seek professional advice
With careful planning and the right approach, you can navigate the home loan application process successfully, even with HECS-HELP debt. As you embark on your journey to homeownership, stay informed about your financial position and don’t hesitate to seek expert guidance to make the best decisions for your future.