How Does HECS Debt Affect Your Home Loan in Australia?

Understanding HECS Debt and Home Loans

HECS debt is a government loan designed to help Australian students pay for their tertiary education. While it offers an affordable way to pursue higher education, it becomes a financial responsibility once your income reaches a certain threshold. In 2023, the repayment threshold is $51,550, meaning repayments start once you earn above this amount.

When assessing your home loan application, lenders consider several factors, including income, existing debts, and living expenses. HECS debt, while often overlooked in casual financial discussions, is considered a liability by banks and lenders. This is because it affects your disposable income and, consequently, your borrowing capacity.

How Lenders View HECS Debt

Lenders assess your HECS debt as part of your overall financial profile. Here's how it impacts your mortgage application:

1. Borrowing Capacity: HECS debt reduces your net income, which is crucial in determining how much you can borrow. Lenders calculate your serviceability based on your income after tax and HECS repayments.

2. Debt-to-Income Ratio: This ratio compares your overall debt to your income. A higher ratio might worry lenders, as it suggests financial strain. Including HECS repayments in this calculation could lower your borrowing power.

3. Credit Assessment: While HECS debt itself doesn’t appear on your credit report, the repayments reduce your net income, indirectly affecting your creditworthiness.

Practical Tips for Managing HECS Debt and Your Home Loan Application

1. Understand Your Repayment Obligations: Familiarise yourself with the current HECS repayment thresholds and rates. This knowledge helps in budgeting and planning your finances effectively.

2. Boost Your Savings: Increasing your savings can offset the reduced borrowing capacity caused by HECS debt. Consider setting up a dedicated savings account for your home deposit.

3. Enhance Your Credit Profile: Maintain a strong credit history by paying bills on time and reducing other debts. A good credit score can improve your chances of securing a favourable loan.

4. Consider a Joint Application: If possible, apply for a home loan with a partner. A combined income can mitigate the impact of HECS debt on your application.

Common Mistakes to Avoid

• Ignoring HECS Debt in Planning: Some applicants overlook their HECS debt during the budgeting process, leading to unrealistic borrowing expectations. Always include it in your financial planning.

• Not Comparing Lenders: Different lenders may view HECS debt differently. Failing to shop around could mean missing out on a lender with more favourable terms.

• Applying Too Soon: Rushing into a home loan application without adequately preparing can lead to disappointment. Ensure your finances, including HECS debt, are in order before applying.

How Esteb and Co Can Help

At Esteb and Co, we understand that navigating the complexities of home loans with existing debts can be daunting. Our experienced mortgage brokers are here to help you understand how your HECS debt affects your borrowing capacity. We can guide you through the application process, ensuring you present the strongest possible financial profile to lenders. From tailored advice to finding the right lender, Esteb and Co is committed to helping you achieve your home ownership dreams.