Your home loan application process will include an assessment of your HECS debt in the same way your other debts (personal loans or credit cards) are reviewed.
On this page, Joust offers expert insight into how you can cut ice with your lender for this specific type of credit.
What is HECS?
First introduced by the Australian Government in 1989, the Higher Education Contribution Scheme (HECS) is a student loan program. A HECS loan can help you pay for your education when attending a university or an approved higher education provider.
To get a HECS, you must be enrolled in a Commonwealth supported place (CSP) and meet the eligibility requirements. While you can use a HECS loan to pay your tuition fees, it does not cover textbooks, student housing, car loans, laptops, or similar monthly or ongoing fees and expenses.
Is HECS the Same as HELP?
Yes!
In 2005, major reforms came into effect for higher education in Australia, including changes to HECS. The Government included more loan types and renamed HECS to the Higher Education Loan Program (HELP).
With the integration of HECS into HELP, the program is now known as HECS-HELP. These income-dependent loan schemes were extended to domestic students who face financial hardships in higher education.
How Does HECS Work?
The Australian Government directly pays your loan amount to your enrolled education institution. As for the repayment, you can directly repay your student debt via compulsory or voluntary repayments with the Australian Taxation Office (ATO).
The income threshold for compulsory repayment varies each year. For example, while it is $47,014 for the 2021-22 financial year, it will be $48,361 for the 2022-23 financial year. Furthermore, the more you earn on your yearly income, the higher HECs student loan repayment becomes.
Based on the calculation of your taxable income when doing your tax return, the Australian Taxation Office (ATO) will inform you how much your compulsory repayment amount is. A key point to remember is that your employer with only withhold the additional tax based on the income they have paid and will NOT include account other surplus income you earn during the year. Thus, you may have to make an additional payment when lodging your tax return.
Meanwhile, voluntary repayments refer to the payments made in addition to compulsory repayments. These repayments are non-refundable and made to the ATO via credit card or BPAY.
How Do I Check My HECS Debt?
You can check your HECS-HELP balance using either of the following options:
- The amount you owe ATO: You can check the amount you presently owe on your HELP debt and any repayments you have made through the Australian Tax Office (ATO) by contacting myGov directly on 12 28 61 or visiting myGov online. Those who do not have a myGov account can create one by following the instructions on the ATO website or call the myGov help desk on 13 23 07; select option 1 and then proceed. The ATO website provides additional information regarding all Study and Training Support Loans, including your HECS HELP loan.
- MyHELPbalance to know the amount available to use: Your myHELPbalance will show you your available balance under the combined Higher Education Loan Program (HELP) loan limit. It is the amount available for you to borrow for your future study using HELP loans.
Does HECS Affect Home Loan Applications?
At the very outset, it’s essential to be aware that your HECS status will come up for scrutiny when you apply, and its status may play a role in determining the result of your home loan application.
Knowing the effect of HECS debt on your financial status is one of the ways your lender will study your ability to pay your mortgage.
To approve your application, your lender will seek proof that you can meet your ongoing HECS repayments and the home loan. In this respect, your student loan is treated the same as any other type of debt like a personal loan or credit card.
Serviceability checks will include comparing your income with your current debts and liabilities. Lenders often calculate the potential applicant’s debt-to-income (DTI) ratio to calculate and understand their total debt exposure.
The National Consumer Credit Protection Act prohibits lenders from approving loans that land borrowers into financial hardship. However, it doesn’t specify how the banks should go about it. For this reason, different lenders have their limits of risk, which they are prepared to accept along with your loan application.
Since different lenders are likely to have varying approaches to the HECS debt – some treating it the same as a regular debt - it shouldn’t stop you from applying for a home loan.
Here are 4 different ways HECS may affect your home loan:
Qualifying for a Home Loan
Banks and lenders in Australia assess home loan applications using certain criteria. If your application doesn’t fall within the scope, it will likely get declined.
When applying for a home loan, you will have to disclose information about your liabilities, dependents, credit status, past credit ratings, and any other debts, including your HECS debt.
A four-year bachelor’s degree ranges from $18,000 and $30,000. This amount works to a rather substantial debt, undermining your loan serviceability capacity. Lenders tend to view this debt through the fine lines against the parameters required to qualify for a home loan.
A HECS HELP debt may figure top at the top of lenders’ concerns when deciding who qualifies as eligible borrowers.
Borrowing Power
Borrowing power describes how much you can borrow based on your financial situation. Having a significant level of surplus income enhances your borrowing power. It can boost your chances of getting your home loan approved as your lender is assured of your capabilities to repay your home loans without facing financial hardships.
If you choose to defer part or full HECS repayment, you would typically start repayments when you reach the income threshold. With the rise in salary, the amount directed towards your HECS debt starts increasing, affecting your surplus income and borrowing power.
On the other hand, since HECS debt is free of interest rate (but indexed to inflation)and repayments are automatically deducted from your salary, it is not seen as hurting your borrowing power as other debts. To assess your borrowing power with your debts, check out our free calculator.
Credit Score
Every person in Australia who applies for a loan or credit in Australia gets a credit score. Based on the credit reporting agency, your credit score can sit anywhere between 0 and 1200.
Lenders refer to this score or rating as one of the critical factors to decide whether to approve your mortgage application. A higher score increases the window of approval.
In principle, the amount you have to pay towards your debt and how fast you pay it off depends on how much your yearly income is. For these reasons, your HECS debt won’t impact your score directly.
However, being aware of your credit score can help you build a robust application for a home loan. If your credit history is below average, you will do well to boost it and reduce existing debt before applying for a home loan.
Debt to Income Ratio
The debt to income (DTI) ratio is compiled by adding up your total debts and personal liabilities and dividing them by your gross income.
A low debt to income ratio puts you in an advantageous position to qualify for the applied loan amount. On the other hand, if your DTI level is high, it may signal that you have too much debt and that your borrowing capacity could be restricted.
Australia’s high DTI ratios have increased since homeownership has become more attractive because of the low-interest rates. However, it also signals that even the slightest small shift in mortgage rates will significantly impact household finances due to high-interest rates.
Some lenders adhere very strictly to DTI limits for home loan applications. In such situations, your HECS debt may be viewed as extra repayments and be the crucial deciding factor in getting a higher loan amount approved.
Should You Declare Your HECs Debt?
When applying for a home loan, you should always declare your HECS debt to your lender.
As you have to provide complete details of your income, expenses, assets, liabilities and other financial obligations to your broker or lender, it is mandatory to furnish information on the balance outstanding on your HECS debt and other outstanding debts.
How to Secure a Home Loan with HECs Debt
Your current HECS debt need not be your biggest hurdle to getting a home loan. With some fine-tuning in strategy, you may still be able to secure a home loan with an existing HECS loan.
Here are some practical ways to reduce financial stress and enhance your home loan application.
Look at Cheaper Property
In some situations, the best strategy is to scale down personal objectives and modify them by opting for a cheaper property than you’d initially planned. While you can always upgrade in the future, you may not need that extra room for now. Or perhaps, if property prices in neighbouring suburbs are lower, it would be easier to sail through the mortgage application.
Pay Off Your HECS Loan V/s Larger Deposit
Reduce unnecessary debts, car loans and other personal liabilities as much as you can if you have the money to do so. You could also choose to pay off your HELP debt to some extent, improving your borrowing capacity before your lenders.
However, the disadvantage is that allocating financial resources to repay your HECS student debt affects your capacity to pay the deposit.
This will increase your loan-to-value ratio (LVR) and home loan repayments, especially if you dip below the 20% deposit threshold. In that case, you’ll have to opt for Lenders Mortgage Insurance (LMI).
Research Home Buyer Grants
First home buyers can assess attractive schemes and grants offered by the Commonwealth and many state governments.
However, you should note that in these cases, much depends on buying a specific type of property that is below a particular value. In some places, if you are a first home buyer, you can enjoy cost savings in stamp duty savings when you buy a property that is below a certain threshold.
Chat With a Mortgage Broker
Connect with a good mortgage broker who has good access to reliable lenders and home loan products; and has a good perspective of the process and which of the lenders are most likely to view your loan application favourably. A good mortgage broker can help you get there, especially if you’re still paying down student debt.
Save Up for Paying a More Significant Deposit
Make way for a large credit limit by saving up a larger deposit. The lesser you require to borrow, the nicer your application looks to your lender. Saving more money can improve your chance of getting a home loan more efficiently, even if it implies that you may have to hold off submitting your application for some more time.
At the same time, holding off buying a new home could also work against you in a rising property market because you may ultimately have to borrow more anyway as property prices rise.
Request Credit File
Before applying for a home loan, order a copy of your credit file. Study your financial position to understand how potential lenders perceive your profile and the steps you may need to take to enhance your credit status.
Why Use Joust Instant Match
Fast track your efforts to secure a home loan while having a HECS debt by using Joust Instant Match. Free to use, the Instant Match immediately matches and connects you with the top three home loans from Joust’s trusted partner lenders in a highly secure environment, using the latest technology. The Joust platform is entirely free to use, and there’s no obligation or pressure to proceed.
Read through some frequently asked questions about Joust for a clear idea of how we work to get you the best home loan products from Australia’s leading and reputed lenders.
