Does HECS-HELP Debt Affect Home Loan Applications?

Your HECS/HELP debt may influence your borrowing power for a home loan, but with the right planning, it doesn't have to hold you back. By understanding its impact on your Net Disposable Income (NDI), you can approach your loan application with confidence and a clear strategy.

How HECS/HELP Debt Can Impact Your Home Loan Application

Does HECS affect home loans? I was recently chatting with a friend about the Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP), and she was surprised to learn that her HECS/HELP debt could potentially reduce her borrowing power when applying for a home loan. A few days later, another friend told me about the rude shock they experienced when they found out their borrowing power had been reduced by nearly $50,000 due to their HECS debt.

As strange as it may seem, having a HECS/HELP debt from university can indeed impact your borrowing power. This is because HECS repayments reduce your Net Disposable Income (NDI), which, in turn, can limit the amount you’re eligible to borrow—sometimes by thousands of dollars. Here’s everything you need to know about how HECS/HELP debt might affect your home loan application.

Does HECS/HELP Affect Your Home Loan Application?

If you’re wondering if a HECS/HELP debt affects home loan applications, the answer is yes—it can. HECS/HELP debt may not have interest, but it does reduce your NDI. Since lenders use NDI to determine your borrowing power, HECS repayments can reduce the amount you qualify to borrow by thousands of dollars. This might come as a shock to many people who assume that because it’s an education debt, it wouldn’t impact their ability to borrow for a home.

Understanding HECS/HELP Debt

HECS/HELP debt is a loan provided by the Australian Government to help students pay for eligible tertiary education courses. It’s a unique type of debt because it doesn’t accrue interest. Instead, it’s indexed annually according to the Consumer Price Index (CPI). Repayment begins once your income reaches a specific threshold, currently around $54,435. The amount you repay is based on your income, not the total HECS debt, with repayment rates varying depending on income brackets.

How Does HECS/HELP Debt Affect Your Borrowing Power?

Borrowing power, also known as serviceability, is the estimated maximum loan amount that lenders assess you can borrow. Lenders consider your income, liabilities, and outgoings when calculating your borrowing power.

If you’re earning above the HECS repayment threshold, lenders will factor these repayments into your liabilities, lowering your overall NDI and, consequently, the loan amount you can access. For instance, a reduction of $50,000 in borrowing power due to HECS debt is not uncommon.

To understand how your NDI is calculated, take a look at this simplified formula:


[(Taxable Income - Tax Payable Incl. Medicare Levy)+ Non-Taxable Income] - Outgoings = NDI


In this equation:

  • Outgoings refer to expenses, including basic living expenses like groceries, rent, utilities, and non-basic expenses like entertainment and insurance.
  • Liabilities cover any regular debts or obligations, including HECS repayments.

Since your HECS debt repayments reduce your monthly income available for other debts, they impact the NDI lenders see, ultimately affecting your borrowing power.

‍

Example: Jasmine’s Borrowing Power with HECS Debt

Consider Jasmine, who earns a gross annual income of $80,000 including super. She has saved $50,000 for a home deposit. Without a HECS debt, Jasmine could potentially borrow between $437,000 and $618,000*, based on her income and estimated living expenses. However, if Jasmine has a HECS/HELP debt and needs to make 3% repayments, her borrowing power might drop to between $413,400 and $601,000**. This represents a decrease of around $17,000 to $23,600, depending on the lender’s criteria.

TThis example highlights how HECS/HELP debt can influence borrowing power significantly. Each lender may have unique assessment criteria, so it’s essential to be transparent with your broker about your financial situation. By understanding your borrowing limits upfront, you can avoid unexpected setbacks in the loan application process.

Should You Prioritise Paying Off HECS or Other Debts?

With recent CPI increases—such as the 7.8% rise in the 12 months leading up to December 2022—it’s natural to wonder if prioritising HECS/HELP debt repayments over other financial obligations might be beneficial. Here are some key factors to consider:

  • HECS Debt Flexibility: HECS debt doesn’t accrue traditional interest but instead grows at a rate aligned with inflation. This generally makes it a comparatively low-cost liability, as it only increases by the Consumer Price Index (CPI).
  • HECS is Waived Upon Death: Unlike other personal debts, HECS is waived if the debtor passes away, which can reduce financial burdens on family members or estate obligations.
  • Income-Driven Repayments: HECS repayments adjust based on income, so if your income decreases, your HECS obligations will also reduce. This income-driven structure can be helpful if your financial situation changes.
  • Prioritising Higher-Interest Debts: For many, it’s financially advantageous to focus on repaying higher-interest debts, such as credit cards or personal loans, which tend to accrue more costly interest over time. Given recent Reserve Bank of Australia (RBA) rate increases, paying down these higher-interest obligations might offer immediate financial benefits.

Ultimately, whether you should focus on paying down your HECS debt or your mortgage is a personal decision based on your financial goals, income, and risk tolerance. Some people may benefit from reducing their HECS debt first to increase their borrowing power, while others might prioritise mortgage repayments to reduce interest costs.

Tips for Managing HECS/HELP Debt When Applying for a Home Loan

If you’re thinking of applying for a home loan and have HECS debt, here are some strategies to consider:

  1. Be Transparent with Your Broker: Discuss your HECS/HELP debt with your mortgage broker upfront. They can guide you to lenders who assess HECS liabilities more favourably.
  2. Use Plans by UNO: Tools like Plans, by UNO can help you estimate how much you might be eligible to borrow, taking your HECS repayments into account.
  3. Evaluate Other Debts: Consider reducing other high-interest debts or outgoings before applying for a loan, which may give you more flexibility with lenders.
  4. Seek Professional Advice: Given the complexity of borrowing power calculations, consulting with a financial adviser can be invaluable. They can provide you with tailored advice based on your circumstances and goals.

For personalised advice on your options, contact a UNO broker today.

Disclaimer: The information in this article is general in nature and should not be considered financial advice. Always consult a financial professional for guidance tailored to your personal situation.

*Jasmine’s salary (gross income) is $80,000 (incl. super). Her estimated taxable income is $71,749while her monthly post-tax income is estimated at $4,831. Using the Household Expenditure Measure (which lenders and brokers will calculate), her monthly living expenses are estimated to be $2,002 (this may vary depending on the lender as each lender calculates HEM slightly differently). Jasmine has no other costs or liabilities, and she does not have any non-taxable income. Using the formula above, Jasmine’s NDI would be $2,829 a month or $33,972 – approximately 59% of her salary.

**Based on the same input figures as the previous example and 2024-25 Repayment Threshold table 3%. Repayment = $2,152 a year ($179 per month), decreasing post-tax income to $4652 a month. The reduced NDI is $2650 a month or $31,800 per year. Numbers have been rounded to help readability.

‍

Source: Australian Tax Office

5 stars for our service reviews from clients

Book Call Now

Janu Dhayanathan

October 31, 2024
Try Plans, by UNO
Mortgage calculators completely reimagined
Get Started
Considering a purchase or refinance?

Try Plans by UNO

Mortgage calculators completely reimagined
Get Started
☎ đŸš« No cold call promise

Related Articles

TESTIMONIALS

What our customers are saying

Kathryn Cretney
November 14, 2024
5 stars for our service reviews from clients
Paul helped us from day one before we even arrived in Australia so we knew exactly what we needed to prepare. He’s got a tonne of knowledge and was really lovely and supportive to deal with. Helpful and easy going. Would highly recommend - now in our first Aussie home and Paul made the process all very easy!
Read more
Sean O'Neill
November 14, 2024
5 stars for our service reviews from clients
We received excellent service and a tailored solution to our home loan requirements from Uno. Paul kept us informed at all milestone stages and throughout the process he demonstrated a ‘can do’ attitude that ultimately allowed us to get over the line and meet our deadline. We’re most grateful and very impressed. Highly recommend
Read more
Crush Huston
November 8, 2024
5 stars for our service reviews from clients
Paul is an amazing broker. Communicative, responsive and knows his stuff! Highly recommend
Read more
Amanda Pearce
November 7, 2024
5 stars for our service reviews from clients
After just four months in Australia, our New Zealand home sold, prompting us to stop renting and invest locally. We found Paul through a Kiwi Facebook group, and his exceptional service exceeded our expectations. From initial contact, Paul provided clear explanations, friendly communication, and prompt responses to our queries, making our mortgage process remarkably smooth. We highly recommend him.
Read more
Dom Saric
November 3, 2024
5 stars for our service reviews from clients
Mike Parsons went above and beyond to ensure that our refinancing journey was painless and successful. He was communicative, accessible (even working while on holidays!), and his knowledge of the systems at play meant that he picked up on things that other brokers missed. Would 100% recommend Mike, and will definitely be back next time we need a broker.
Read more
Ashleigh Breaden
October 31, 2024
5 stars for our service reviews from clients
Mike Parsons handled our refinance of our home loan with ease and a depth of knowledge that ensured we got the best deal possible for our situation. We didn't have an easy one to solve for with my husband being self employed and we were consolidating finances as well for a car loan. But Mike handled it all for us and once we had provided him with all the documents we literally didn't have to do a thing after that, it was so easy and so quick we are super happy with the experience! Top notch! Highly recommend!!
Read more
Kyle Richards
October 10, 2024
5 stars for our service reviews from clients
Absolute legend, helped me through the first home buyers scheme, explained everything in a way that made sense, was very knowledgeable and a joy to work with.
Read more
Chloe S
October 8, 2024
5 stars for our service reviews from clients
Mike Parsons made it possible for us and the in laws to get 2 pretty complicated home loans. He helped us through everything and we'd be happy to use Mike and the team again for anything we needed. Thanks again!
Read more
Sam Rezai
October 2, 2024
5 stars for our service reviews from clients
I have gone through 6 different mortgage brokers prior to meeting Andrew Wyers. He is the most patient mortgage broker I’ve encountered and also the most knowledgable about the bank’s lending process and products available. It took me 1 year to find a house I was happy with and Andrew was always there to assist with any issues or questions I had; he always return my phone call, even on the weekends or when his away on holidays. The loan process was smooth and I had no complications. The process with Andrew was again nice and easy, he took the time to find and put together the right package that was suited to my situation. I have recommended Andrew to my family & friends and everyone have been grateful and completely satisfied with his service.
Read more
S Wilko
September 23, 2024
5 stars for our service reviews from clients
I had not dealt with Scott or UNO before finding them on the internet. Even as an Australian citizen living and working overseas, I knew obtaining a loan would be difficult. However, Scott went above and beyond what I expected from a mortgage broker. I genuinely don’t think you could find another company that works as hard as they did to get my home loan approved. I cannot recommend them highly enough. Everyone I dealt with at UNO were extremely professional and helpful. If you are looking for a broker, you would be mad not to give them a go. Thanks to Scott Wilkinson, Dalby Bajwa, Jena Lasquite and Andrew Pacini. Shaun.
Read more
Patrick Winters
August 14, 2024
5 stars for our service reviews from clients
For the past three years, it has been an absolute pleasure to work with Mike Parsons. He has consistently helped us navigate commercial property loans with skill and efficiency. Mike’s timely and professional responses to our inquiries have been invaluable. We have built a strong, reliable relationship with him and eagerly anticipate continuing our collaboration in the future. We highly recommend his services.
Read more
Lee Robibaro
August 6, 2024
5 stars for our service reviews from clients
I am so thankful and grateful to have Scott Wilkinson as my broker. He not only looked after me every step from start to finish he gave me confidence and I was able to trust him and his expertise. My children and I are now happy in our new home and very appreciative of Scott's help. I will definitely be only having Scott as my broker from here onward as there is no mucking around and straightforward answers. Thanks again
Read more