How HECS debt can affect your home loan application
HECS-HELP debt is sometimes referred to as ‘good’ debt because you’re investing in your future. Additionally, unlike most forms of debt, the loans are interest-free.
But while HECS-HELP debt doesn't attract interest, it is indexed to inflation. The indexation figure is based on the consumer price index and applied to the loan balance on 1 June each year.
Inflation was generally low for the 10 years to 2022, so the indexation rate averaged 2.0%.
However, this year, HECS-HELP loans increased by 7.1%.
As a result, if you have an outstanding loan balance of:
$10,000 – your debt will have grown by around $710
$25,000 – your debt will have grown by around $1775
$50,000 – your debt will have grown by around $3550
When you apply for a home loan, lenders look at your total liabilities, including HECS debt, when they assess your serviceability.
So this increase will have impacted your ability to borrow money.
However, it won’t affect your credit score.
HECS debt and borrowing power
Your HECS debt repayment rate is determined by income, with those on lower incomes paying back 1% of their income. The highest earners pay back 10%.
This means, if you have an outstanding $10,000 student loan but earn $100,000 income, your repayments will be larger than someone with an outstanding $100,000 student debt who earns $60,000 income.
So, as a general rule, the more you earn, the larger the proportion of income that goes towards servicing your HECS debt, and the bigger the hit to your borrowing power.
Is paying off HECS debt a good idea?
It might be worthwhile paying off your student debt entirely before applying for a home loan, particularly if you have minimal HECS owing, earn a strong income, and have the savings to do so.
That said, it’s always best to run the numbers first with an expert mortgage broker, such as Eventus Financial.
That’s because, in some cases, you might end up in a better position if you put those extra savings towards your deposit, rather than paying off student debt.
For example, if doing so will lower your loan-to-value ratio to below 80% meaning you can avoid lender’s mortgage insurance and qualify for a better interest rate.
Looking for an award-winning mortgage broker in Sydney? Eventus Financial has over 365 five-star Google reviews and a very strong reputation. Schedule a no-obligation consultation with Alex to find out how we can help you.