Higher education is an integral part of Australian society and culture. In fact, it’s often viewed as the basis for innovation and discovery in our country. Because of this, the federal government is committed to supporting Australians to gain a tertiary education. And part of the way they do this is through the Higher Education Contribution Scheme (HECS).
As mortgage brokers, we’re often asked about HECS debt in terms of buying a home. In particular, our clients want to know, ‘does HECS debt affect borrowing power’.
Before we can answer that question, we need to understand what HECS is and how it’s repaid. Then we can understand how that impacts borrowing power.
HECS is a student loan system that helps pay the ‘student contribution amount’ of a degree at a public university or private higher education provider. In other words, it covers all or part of the tuition fees to allow students to better access education.
Since its introduction in 1989, HECS has assisted thousands of eligible students to study and gain tertiary qualifications. But the scheme has undergone several changes over the years.
Significant funding changes to HECS were announced in the 2003-2004 Commonwealth Budget, including the introduction of the Higher Education Loans Program (HELP). HECS then officially became HECS-HELP though it’s still commonly shortened to HECS.
Yes, HECS debt is considered to be the debt of the borrower. And most lenders will treat it the same as any other debt when considering whether to loan the borrower more money. However, HECS debt is not treated just like other debt in other ways – for example, in how it is repaid.
If you use HECS to pay for your tertiary study you will need to repay those amounts to the federal government. To repay this debt, you will be required to make compulsory repayments on a tiered schedule. That means that your compulsory payments will start when your repayment income exceeds the minimum repayment threshold.
These thresholds are then adjusted annually, to take into account any changes in your average weekly earnings. So as your income goes up, your repayments go up as well.
Your repayment income for a HECS debt is determined through certain amounts detailed on your tax return and payment summaries. All repayments go through the income tax system via the Australian Tax Office (ATO).
One fantastic benefit of HECS is that it’s interest free. However, this doesn’t mean that your amounts owed will always remain the same. In fact, the amount you owe is indexed in June each year. This means that the ATO will adjust the value of your HECS debt, based on the Consumer Price Index (CPI) so the true value of the loan remains accurate and in line with the cost of living.
Indexation also means that while you won’t be paying more in interest rates, the longer the life of your loan, the more you will be paying overall. So it makes sense to try to lower your HECS debt as quickly as possible.
While we know that debt generally affects a borrower’s ability to borrow more money, there’s often a question over HECS debt. Does it affect borrowing power as well? And if so, how?
The short answer is yes. HECS debt impacts your borrowing power just as all debt does.
Whenever you apply to borrow money, your prospective lender will review your current debts. They use this information to determine your debt-to-income ratio which they then use to ascertain how much they are comfortable loaning you. And like any debt, your HECS debt will be part of that determination.
This holds true for all loans you might consider – from home loans to auto loans. If you are applying for a home loan, your prospective bank or lending institution will treat a HECS debt the same as they treat any other of your financial obligations. Because of that a HECS debt will affect your borrowing power, particularly if you are a first home buyer or on a low-income.
You may also make voluntary repayments at any time to lower your HECS debt. This will shorten the life of your loan, but it will not decrease your monthly payments. Your HECs commitment will remain unchanged because it’s based on a set percentage of your taxable income – no matter the level of debt.
Because of that, making a partial reduction to your HECS debt won’t improve your borrowing capacity in the immediate term. Instead, we suggest allocating the funds you have to make additional HECS repayments to a savings account, or to pay down other types of debt (such as credit cards or short term consumer loans). In this way, you’ll have more available income to leverage to increase your home loan borrowing capacity.
Paying your HECS loan off in full, however, is an excellent way to increase your borrowing capacity. If you have access to a family gift, for example, you can perhaps use this to clear your HECS debt. If you need, our team is happy to help you run the numbers to determine what you will need to pay off the debt completely.
Whether you have acquired debt through HECS or through another method, carrying it might limit your ability to borrow more money in the future. And this could derail your future plans to buy a home, for example.
But there are some things you can do to improve your home loan borrowing power when you have a HECS debt.
Do you have a HECS debt? It doesn’t have to stop you from a home.
Our team of experienced Brisbane mortgage brokers can take a closer look at your individual financial circumstances to see does HECS debt affect borrowing power and what you can do about it. Get in touch today.
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