Does HECS Affect Home Loan Applications and Borrowing Power?

If you’ve been to university, done tertiary study or perhaps even taken a trade, you may have a student debt. Read on to find how it could affect you.

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If you’ve been to university, done tertiary study or perhaps even taken a trade, you may have a student debt. There are various types of student loan programs available in Australia, with some of the more common types including:

  • Higher Education Contribution Scheme (HECS-HELP)
  • Tuition Fees (FEE-HELP)
  • Trade Support Loans (TSL)
  • VET Student Loan (VSL)
  • Student Start-Up Loan (SSL)

A HECS debt is one type of financial assistance available under the Higher Education Loan Program (HELP). There are also several older student loan schemes that have been discontinued or replaced. The majority of these student loan programs fall under the same repayment thresholds and are collected in the same way. 

Once per year, applicable student debts will be indexed based on the Consumer Price Index (CPI) and the balance will increase. The Consumer Price Index increase is calculated each year after the March CPI is released and the increase is applied on June 1. 

How and when are HECS debt repayments collected?

HECS debt repayments are compulsory once your repayment income reaches a certain threshold. If you are a PAYG or salaried employee and have provided a correct tax file declaration to your employer, they will generally deduct this amount from your pay for you. You must notify your employer if you have an applicable student debt. 

For more information on HECS debt repayments and thresholds, check out the ATO Website or ask your mortgage broker. Your mortgage broker and the lender will also take into account your HECS debt repayments when assessing your home loan application. 

Can you get approved for a home loan if you have a HECS debt?

In short- yes, you absolutely can. Having a HECS debt does not mean that you can’t get a home loan. However, it is important that the compulsory repayment amount is factored in to your borrowing capacity when assessing your borrowing power. Unfortunately, many online calculators completely exclude this in their calculations. 

Will a HECS debt affect my credit rating? 

No, simply having a HECS debt should not affect your credit rating or score. Items that tend to have a negative affect on your credit rating or score include:

  • Missed or late repayments on existing loans
  • Defaults or court judgements
  • Frequent applications for credit

If you have concerns around your credit file, your mortgage broker can review your credit file prior to you lodging an application to a lender. 

What are the key factors lenders consider when you apply for a home loan? 

The main assessment criteria a lender is looking at when you apply for a home loan are:

  • Serviceability- this is essentially a test of income vs commitments to ensure you can afford the home loan
  • Equity/deposit amount- you need to have sufficient savings or equity in another property to proceed with the transaction
  • Creditworthiness- any home loan lender will review your credit file and check your conduct on existing liabilities and frequency of applications for credit

Of these three main criteria, having a HECS debt will generally only impact the serviceability assessment. 

How does a HECS debt affect your ability to get a home loan? 

Having a HECS debt will add a liability to your asset position, which in turn will reduce your borrowing capacity. For example, if your HECS repayment is 5% of your income and you earn $85,000p.a., a commitment of $4,250 per annum or $354.17 per month needs to be included in your home loan assessment. 

At an interest rate of 6%, this commitment is roughly equivalent to a $59,000 difference in borrowing capacity on a 30 year home loan!

How do lenders view a HECS debt in comparison to other debts? 

The vast majority of home lenders do not have an issue with an applicant having a HECS debt. The reality is, many credit worthy, high quality applicants have one. HECS debt may be viewed more favourably than other types of credit- for example unsecured personal loans and credit cards can be a higher risk indicator to home lenders. 

Should you consider paying off a HECS debt before applying for a home loan? 

Depending on your desired purchase amount, savings and overall scenario, it may be beneficial to pay off your HELP debt to increase your borrowing capacity with a lender. As part of your preliminary assessment, your mortgage broker will calculate your borrowing capacity. If this is not where you would like it, you may choose to close off your HELP debt to increase your borrowing power. 

If you have a HECS commitment and are considering a home loan, we would suggest discussing it with your mortgage broker first. If paying off your HECS debt is required for your home loan application, they will confirm the process and timing required. 

Check out how HECS HELP debt may impact home loan borrowing power

Use one of our calculators:

If you’d like to see detailed, tailored figures for your personal circumstances, your mortgage broker will cover this in full as part of your obligation-free Preliminary Assessment with Simplifi Lending. 

Final thoughts 

Having a HECS debt does not mean you won’t get approved for a home loan application. If you’re looking to purchase, refinance or understand your borrowing power, get in touch with an expert mortgage broker at Simplifi Lending today!

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