How your HECS debt affects your home loan

If you used HECS to help fund your university degree, you might be wondering how this type of debt impacts your chances of getting a home loan. While most banks and lenders will take your HECS into account when calculating your borrowing power, it’s often treated differently from other types of debt.

Here’s how it works.

What is HECS?

But first, what is HECS? HECS, also known as HECS-HELP, is short for the Higher Education Contribution Scheme (HECS) and Higher Education Loan Program (HELP). HECS is an Australian Government funded scheme that helps eligible students pay for their university education. 

In a nutshell, under HECS, the government covers the initial cost of your university fees. Then, once you reach a certain income level after graduation, you’ll start making repayments toward your HECS debt through the tax system as a percentage of your income. The percentage increases with higher income brackets. The repayment thresholds change each year, but you can check out the current repayment thresholds and rates on the Australian Taxation Office’s website here. 

While the HECS debt doesn’t attract interest, it’s indexed each year in line with the Consumer Price Index (CPI) to reflect changes in the cost of living. 

HECS debt vs regular debt

Depending on how long you were at university and what you studied, there’s a good chance you’ll still have a HECS debt when it comes time to take out a mortgage. HECS works a little differently compared to regular forms of debt, like credit cards and personal loans, so banks and lenders often treat it differently when assessing your loan application.

Rather than having to budget for your HECS repayments from your after-tax income, your HECS repayments are automatically deducted from your wages before the cash even hits your account. It’s for this reason that many lenders consider HECS debt to be a little less risky compared to other, more traditional forms of debt.

Does HECS debt affect borrowing power?

In short, yes, having a HECS debt will affect your borrowing power, but don’t let that put you off applying for a home loan.

Here’s how it impacts your financial situation and ability to secure a home loan:

• Debt-to-income ratio: Lenders assess your ability to repay a loan by looking at your debt-to-income ratio. This ratio includes all your financial obligations, such as existing debts, including HECS debt, compared to your income. While HECS repayments are typically a small percentage of your income, they still reduce your disposable income, affecting how much you can borrow.

• Serviceability calculations: When assessing a home loan application, lenders perform a serviceability assessment to determine if you can afford the mortgage repayments. HECS repayments are factored into these calculations, which can lower the amount you’re eligible to borrow.

• Monthly repayment obligations: HECS debt repayments are deducted from your income through the tax system once you reach a certain income threshold. This effectively reduces your net income, impacting the monthly repayment capacity that lenders will consider when evaluating your home loan application.

• Credit assessment: Although HECS debt does not appear on your credit report, lenders still consider it as part of their overall credit assessment process. They typically ask about all existing debts, including HECS, to get a complete picture of your financial commitments.

Does HECS affect your home loan?

At the end of the day, your HECS debt will impact your borrowing power, and ultimately your home loan, by reducing your assessable income. Your income decreases in line with the percentage of your HECS repayments. So, if you earn $75,000 during the 2023-2024 financial year and you’re making HECS repayments at a rate of 3.5%, your HECS debt would essentially decrease your borrowing power by 3.5%.

Should I pay off my HECS before applying for a home loan?

Well, it depends on your individual circumstances. If you have a small HECS debt and enough cash in your savings to clear this debt, it might help do so to boost your borrowing power. On the other hand, if you’ve got a sizable HECS debt and paying it off would leave you with nothing left for a house deposit, it might not be the best move for you. However, everyone’s situation is different, so it often pays to chat with a mortgage broker for more tailored advice.

There’s also the issue of other debt racking up interest and chewing away at your borrowing capacity. If you’ve got any other high-interest debts, like credit cards and personal loans, you’re often better off paying these off first before you think about tackling your HECS debt. 

Things to consider when applying for a home loan with a HECS debt

Just because you’re still repaying your HECS doesn’t mean you can’t apply for a home loan. Here are a few tips to consider to help you approach buying a home with HECS:

• Check your HECS balance: Before applying for a loan, it can be worth revisiting your HECS debt to see where you stand. Just log into your myGov account to see how much you’ve got left on your HECS.

• Reduce other debts: Work on minimising other debts, like credit card balances and personal loans, to improve your overall debt-to-income ratio.

• Boost your savings: Lenders like to see cash in the bank, so a larger deposit can improve your borrowing capacity and show lenders that you have good financial discipline.

• Check out government grants and subsidies: There are several government incentives and programs, including the Home Guarantee Scheme (HGS) and the First Home Owner Grant (FHOG), that are designed to help first home buyers get into the market, whether you still have a HECS debt or not. It can be worth seeing if you’re eligible for any grants that could help you get into the property market sooner. 

This content has been created for educational purposes only. Unloan may not provide all features discussed. Visit our product page here to learn more about our home loan features. 

Whether you’re looking to buy a property or refinance your current home loan, Unloan can help. Packed full of great features and a competitive interest rate, we’ve created a home loan that’s simple to understand and even easier to live with. Check out the eligibility criteria today.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

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