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Pay off your HECS for more serviceability

Discussion in 'Property Finance' started by scientist, 29th Jun, 2016.

  1. scientist

    scientist Well-Known Member

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    Seems obvious but I'm excited to share I realised this today after having a chat with a lender. If I pay my HECS off (owing 55k for me and wife) it gives us an additional 200k borrowing capacity.

    Obviously not the right advice for everyone, and obviously HECS is extremely cheap financing, but for my situation this is great, am seriously considering.
     
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  2. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Yep.

    But wait, there's more.

    Many lenders will allow you to draw equity to pay out HECS. Depending on your incomes (thus the annual HECS repayment) and the lender (how they assess existing debt) this may also improve your borrowing capacity, and avoid you having to use after-tax dollars to pay out HECS.

    Same can be said for credit cards, personal loans and the like.

    Of course, the above is not advice and you should seek professional advice from someone qualified before doing any of the above.
     
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  3. Wall Street

    Wall Street Well-Known Member

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    Seeing as HECS is only indexed at inflation, would it not be better to keep this 'cheap debt' and use the money to pay down debt elsewhere?

    (EDIT - didn't see the last line!)
     
  4. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    Are all your loans currently with the same bank? You can get a pretty big uptick in servicing but splitting loans across multiple lenders. Might let you keep the HECS debt and get the extra $200,000!
     
  5. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    HECS is probably the cheapest loan you'll ever get in terms of rates.

    Unfortuantely the repayments are indexed to your income. When it comes to serviceability, lenders are primarily interested in the repayments for this type of debt.

    It might seem counter intuitive as it's such a cheap loan, but paying off the HECS debt will allow you to borrow significantly more for a property.
     
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  6. Scott No Mates

    Scott No Mates Well-Known Member

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    Borrowing, redrawing, drawing on equity etc to pay out non-deductible HECS debt may contaminate your loan (purpose of the borrowed funds). Seek proper financial advice before following any course of action.

    Although paying out the debt may improve serviceability it may cost you in lost interest deductibility.
     
    Last edited: 29th Jun, 2016
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  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The most common scenario I see is where people have only got a few grand to pay off. I don't think borrowing from a bank to pay of HECS would be warrented in all but the most extreme cases.
     
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  8. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Bingo. One of my guys in the office is doing this at the moment for a file - client pays out a 3k residual balance, opens up 100k in additional servicing.
     
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  9. albanga

    albanga Well-Known Member

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    Yeah got to say releasing 50k equity at say 4% to pay out an indexed loan to increase servicing to invest doesn't make a lot of sense to me.

    You would need to definitely factor that additional cost into your numbers to work out if the IP is a good buy.
     
  10. neK

    neK Well-Known Member

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    Unless there is a required need to increase your serviceability, that's just silly.
    As mentioned, HECS/HELP debt is indexed at inflation.
    HECS/HELP debt is paid with pre tax money

    I've always looked at how much is owing on HECs and how much the ATO is going to withhold when making a decision to repay or not. There is still a voluntary repayment bonus of 5% until Dec 2016.

    For example, if you earn $100,000, you are required to repay 7.5% - $7,500.
    If you owe $8,000, then it would make sense to repay the $8k upfront ($7600 with discount) (just before submitting your tax return for 2016), that way you get the money that was withheld back within 2 weeks. When the discount was 20% it was even better!
     
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  11. virgo

    virgo Well-Known Member

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    i am wresting with myself whether to pay HECs for my son or not....it's doing my head in...
     
  12. Bran

    Bran Well-Known Member

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    My thoughts - Don't, at least not for now. Let him see the debt and work for the cost accordingly. Free money from you might negatively impact his application to the course.
     
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  13. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    *snip*

    I think you missed the first post.
     
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  14. neK

    neK Well-Known Member

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    No, i didn't. :)
    I'm simply adding clarification so that people don't place HECS debt in the same bucket as credit cards.

     
  15. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    I would say don't pay, your son is going to be much more motivated to actually do well if he knows it's coming out of his back pocket in the end!
     
  16. jins13

    jins13 Well-Known Member

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    That's excellent news! I have around $40k in HECS/HELP debt at the moment and it really is an Achilles heel for me at the moment, I think I may consider paying off this debt as well if it means I can squeeze another deal out of it before I reach the cap.
     
  17. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    With that level of HECS, talk to a broker to get a good understanding of what you can do with the ongoing HECS debt and what you can do without it. In most situations we've found that people can still do a lot with the HECS debt still in place. Often the biggest challenge for people isn't serviceability, it's getting the deposit together and paying of a $40k cheap debt might be counter productive.
     
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  18. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    Agree with Pete. Chat to your broker before you pay out HECS. See what you can do with it remaining. If no options exist, then it may be worth considering.
     
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  19. Perthguy

    Perthguy Well-Known Member

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    My advice... don't. I accumulated a HECS/PELS debt of nearly $40k. I paid it off at the required rate when my salary reached the threshold. The payments are so small that it didn't affect my lifestyle and it never stopped me getting a loan. However, it did help me understand compounding, debt and paying off debt.

    If you want to do something, could you joint venture and investment property?
     
  20. Caffeine User

    Caffeine User Member

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    Slightly off topic but may help some.

    Instead of PAYG HECS, fill in the forms to pay HECS in bulk after the FY, the money works better in your bank account than it does in limbo. It's even better when you have an accountant further delay the submission by 11months.
     
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