Well, this week may be the week that the RBA drops the cash rate. The last time the reduced it was on November 4, 2020, lowering it to a historic low of 0.10%. Since then, it has increased to 4.25%.
A drop of 0.25% is expected by the majority of pundits, and if this get passed on by the lenders to eligible borrowers, it would result in handy little saving.
For instance, with a $500,000 loan over 30 years, such a rate cut would decrease monthly repayments by approximately $70. Given that the average new owner-occupier home loan in Australia is around $642,121, borrowers could see monthly savings of about $90 following such a reduction.
Whilst this may not seem like a lot in isolation, it will certainly add up to a good saving over time. And of course, it will improve borrowing capacities.
Off the back of direction given by the Federal Treasurer during the week, in today’s newsletter, we take a look at some changes to the impact that a HECS debt can have on borrowing.
During the week, the Federal Treasurer called on Australia’s regulators to help make it easier for Australians with student debt to take out a mortgage and buy a home, having instructed both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) to update their guidance regarding the way Higher Education Loan Program (HELP) debts are treated by lenders.
How Do Banks Currently Treat HECS Debts?
As it stands, when applying for a home loan, lenders assess an applicant’s ability to repay the mortgage based on their income, expenses, and existing debts. HECS debt is factored into this calculation as it reduces an applicant’s disposable income, which in turn lowers their borrowing capacity.
For example, someone earning $90,000 per year with a HECS debt will have an automatic repayment deducted (currently around 7% of their income). This means lenders view their effective income as $83,700 instead of $90,000, reducing the amount they can borrow.
In recent years, high inflation has worsened the issue as HECS debts have been increasing sharply. In 2023, HECS was indexed at 7.1%, causing many graduates’ debts to surge unexpectedly. This made home loan applications even more difficult, particularly for first-home buyers already struggling with rising property prices.
What Is Changing?
Under the updated lending rules, financial institutions will soon have the option to exclude HECS repayments when evaluating an applicant’s mortgage serviceability.
So whilst not a directive, it gives lenders the option to disregard the debt when assessing a person’s borrowing capacity.
But the news may not be music to the ears of everyone with a HECS debt, particularly those who are several years off repaying the entire debt.
Under the new guidelines, banks may disregard student loans when assessing home loan applications, but only for borrowers expected to clear their debt within a year.
Nearly 3 million Australians had a HECS debt in the 2023-24 financial year, and the data shows it is taking longer for recipients to pay it off. In 2023-24, the average time to repay a student debt in full was just under 10 years, up from 7.3 years in 2005-06.
Around 501,000 people had a debt of between $20,000 and $30,000, another 380,000 owed up to $40,000, while 39,000 people owed up to $90,000.
Final Thoughts
This is great news for approximately 10% of people who have a HECS debt, which means circa 300,000 people. As for the other 2,700,000 who have more than a year remaining to pay it off, they’ll have to wait a little longer to get the possible exemption.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
