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What a HECS/HELP debt means for your home loan application

Discussion in 'Property Finance' started by Belinda Punshon, 15th Mar, 2016.

  1. Belinda Punshon

    Belinda Punshon Member

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    Hi all,

    I wrote this article about how a higher education debt can impact someone's home loan application and what you can do to improve your chance of being approved.


    If you’re a university graduate, it’s likely that you’ve accumulated a debt as part of the Higher Education Contribution Scheme (HECS) during your tertiary studies. Many students choose to defer payment of their tertiary education through this higher education loan program with the intention of paying the government back once they start working.

    Your higher education debt may have been a non-issue during your course when you were darting in and out of lectures and tutorials, but you have to face the music once you enter the workforce and reach a certain income threshold.

    In essence, a HECS/HELP debt is treated like any other liability during a home loan application. Because it reduces your income, your serviceability potential and borrowing capacity is lowered, which increases your risk profile.

    However, there are steps you can take to raise your chance of qualifying for finance.

    How can a HECS debt affect my chance of qualifying for a loan?
    When you apply for a home loan, the lender will ask you to disclose information about your liabilities, including the number of dependents that you have, poor credit ratings as well as any other debts. This is where your HECS/HELP debt comes in.

    If you’ve decided to defer part or all of your HECS/HELP payment, then you normally aren’t required to start repaying the debt until your annual taxable income is $51,309 or greater.

    Once you reach this threshold, your employer will withhold 4% of your taxable income, which will be directed towards your HECS/HELP debt. The amount of withheld salary will increase once you start earning $77,248 or more.

    Data from the Australian Scholarship Group (ASG) indicates that an average four-year bachelor degree ranges from $18,000 and $30,000, depending on the institution. This is a hefty debt, which can reduce your home loan serviceability potential.

    As a result, the lender will review this debt carefully (just like other personal liabilities such as credit cards or number of dependents) when deciding whether or not you’re in a sound financial position to repay the loan.

    How can I improve my chance of qualifying?
    Having a HECS/HELP debt can negatively affect your ability to qualify for a loan, so here are some ways you can improve your chance of qualifying:
    • Request credit file. Before applying for a home loan, you should order a copy of your credit file to understand your financial position. Reviewing your credit file can help you understand how you will be perceived as a borrower and whether you need to take any steps to improve your credit status.
    • Reduce existing debt. If you have several debts such as personal loans or credit cards, you may want to consider consolidating them to benefit from a lower interest rate. However, be careful about combining short-term debt with long-term debt due to the variation in loan terms. For instance, if you took out a $10,000 personal loan at 14.5% interest over five years, you would have monthly repayments of $235 and total interest payable of $4,117. However, if you decided to consolidate this debt into your mortgage over 30 years (even at an average interest rate of 4.5%), the total interest payable on this portion of the loan would be significantly higher, as it’s extended over a longer term.
    • Evidence of savings. As a HECS/HELP debt greatly reduces your income and serviceability potential, you should be proactive about demonstrating that you have a good savings record. This can be done by making regular deposits into a high-interest savings account, as it shows the lender that you have financial discipline.
    • Speak to a broker. A licensed mortgage broker can help you understand your home loan options and your borrowing capacity. Mortgage brokers have expert knowledge of the home loan industry and can help you find a specialist lender that may be more likely to approve your application despite your HECS/HELP debt. A broker can also help you complete the paperwork and negotiate a competitive rate on your behalf.
    • Be candid. When you approach a broker or lender, you need to be honest about your financial position. This means you need to disclose all details regarding your assets and liabilities, including your HECS/HELP debt. If you omit this from conversations, you risk applying for the wrong home loan product, defaulting on your home loan or potentially experiencing mortgage stress.
    • Be conservative. It’s important to be conservative when estimating your income, assets and liabilities. For instance, don’t include superannuation in your base salary, and ensure that your property has been recently and independently valued. Don’t overlook expenses such as childcare costs.
    • Don't overapply. Be selective about the home loans you apply for. Each time you apply for a home loan, your lender will review your credit rating. When this happens, it shows up on your credit file. As the lender cannot see the outcome of previous enquiries on your credit file, it may be assumed that you’ve been rejected for several home loan applications. This is a red flag in the lender’s point of view. Thus, applying for several loans at once can harm your ability to qualify for a loan.
    Keen to hear feedback surrounding this topic, thanks :)
     
    Last edited by a moderator: 15th Mar, 2016
  2. thatbum

    thatbum Well-Known Member

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    I didn't think a HECS debt was particularly a big factor in qualifying for a loan compared to other factors like income and other AFI liabilities.

    Maybe some of the brokers here can confirm?
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    They sure are an impact - 4% is quite a whack out of a low income, so it can make a huge difference when servicing is already tight. In some cases, especially if there's not much of the debt left to repay, it can be worth using cash to pay it off just for the increase in servicing.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes the HECS will be taken into account in servicing for many lenders. I think the repayments can be up to 8% of annual income so it can be a lot of impact.
     
  5. Michael_X

    Michael_X Mortgage Broker Business Member

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    It's a liability which decreases your borrowing capacity. As a guide, below is how CBA calculate the commitment:

    Gross Annual Income adopted for servicing
    % rate to be applied to calculate HECS/HELP per annum


    Below $53,345 Nil
    $53,345 - $59,421 4.0%
    $59,422 - $65,497 4.5%
    $65,498 - $68,939 5.0%
    $68,940 - $74,105 5.5%
    $74,106 - $80,257 6.0%
    $80,258 - $84,481 6.5%
    $84,482 - $92,970 7.0%
    $92,971 - $99,069 7.5%
    $99,070 and above 8.0%

    So for example, on a $60,000 per annum salary, you are looking at a commitment of $2,700 annually. In terms of borrowing capacity, that's a difference of around ~$36,000 in borrowing power.

    Hope this helps,
    Michael
     
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  6. thatbum

    thatbum Well-Known Member

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    Ha I guess I'm stuck with it for a while then. My HECS liability was ~$60k at one point. Law double degree and a grad diploma in legal practice will do that.
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    The thing with HECS is that it's calcualted as a % of what you earn, not what you owe. So you can have a huge debt and not pay it (and not be impacted for servicing), or a tiny one that looks for servicing purposes like your paying 8% of your income.
     
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  8. jins13

    jins13 Well-Known Member

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    I'm around $40k odd atm and still growing each year due to my constant quest to learn abit more. One day I hope that I an have my HECS/HELP paid off.
     
  9. Perthguy

    Perthguy Well-Known Member

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    It might be a "hefty" debt for a low income earner but I don't consider up to $30k "hefty". I know people with personal credit card debt a lot higher than that. If you want to see a hit on home loan serviceability, try having a personal credit card debt of ~$50k.

    This is one of the best peices of advice I have seen on this forum. Excellent work!

    ^^^ all of this. Great advice!

    My peak HECS/PELS debt was ~$45K. The total debt was not taken into consideration when I applied for loans, only the amount deducted from my salary to repay the debt. As my income was fairly modest for my first 2 investments, my serviceability was not affected very much. I had a credit card with a $12k limit and even though I could prove I paid it off in full each month, that had a much bigger impact on my serviceability than my HECS/PELS debt. The entire $12k is taken was taken into account when caclulating my serviceability, so I worked out with my broker it would be best to cancel the card prior to lodging the loan application. This is an option for people who might be borderline for approval for a loan, in the context of your advice above to be conservative.
     
  10. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I was fortunate. I think my HECS debt came out to about $12k all up. I started uni in the first year that they introduced HECS, the fees have gone up significantly since then.

    HECS is seen as any other liability and is similar in nature to a personal loan. The actual repayment (which is shown on your payslip) is entered as a liability. It's fairly straight forward but people often forget it (which is one reason we need to see payslips).

    HECS has an impact on your affordability, but it's also the cheapest loan you'll likely ever have. If you've got other debts and spare cash, better to pay off the credit cards and personal loans first.
     
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  11. albanga

    albanga Well-Known Member

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    My only note would be whilst HECs is a debt it attacts no interest and only an annual CPI increase.
    Point being whilst it's good to pay off debt, I would focus on harsh debt first (credit cards, car loans.etc).
    Once done I would always save as opposed to paying of this debt for either purposes such as not getting more harsh debt and ofcourse saving a deposit which if invested properly will have FAR greater benefits.
     
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  12. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    That's exactly right - it's all about the prioritisation of the repayment of debt.

    Besides the interest saving in paying debts such as credit cards first, it'll also be more efficient for your borrowing capacity.

    For example, if you were on say $60,000 per year on income and had the choice between repaying a 20k credit card or 20k HECS, the credit card liability will be considered between 2-3x greater in impact, therefore much more preferable to repay and close in both interest and serviceability.
     
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