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The impact of HECS on borrowing

March 9, 2024

In worrying news during the week, RBA data revealed that credit card debt increased by 1.56 per cent annually in January, with a total of $17.58 billion now accruing interest charges.

Whilst the increase in isolation may not in itself be worrying, the fact that growth in credit card spending has outstripped growth in retail sales over the past few months, suggests that people are turning to credit cards to pay their bills where previously they would have paid with cash.

A university review just released illustrates how crippling HECS debts are forcing some young Australians to choose between buying a home and an education, sparking calls to overhaul the way banks assess student loans. In this week’s newsletter, we look at how a HECS debt is impacting peoples ability to get into the housing market.

What exactly is HECS?

HECS-HELP stands for the Higher Education Contribution Scheme (HECS) and Higher Education Loan Program (HELP). But it’s often just shortened to HECS. Thanks to the scheme, eligible students can borrow money to attend university or an approved higher education provider.

The scheme is set up in a way that makes paying back your HECS-HELP debt manageable. The amount you pay is tailored to your income bracket as outlined below, so it adjusts as you progress in your career.

The impact of HECS on borrowing capacity?

Lenders prioritise risk assessment above all else when evaluating home loan applications. Their aim is to ensure they’ll recoup their investment and that borrowers can meet repayment obligations. This process involves scrutinising various factors, with the borrower’s ability to service the loan being paramount.

Despite the financial obligation with automated repayments, HECS-HELP debt alone doesn’t necessarily reflect creditworthiness, making it challenging for lenders to draw meaningful conclusions from it, but many do take it into account because of the impact it has on take home pay.

Given lenders are concerned about your take home pay – not your gross income – it stands to reason that a HECS debt will impact how much a lender is prepared to offer you.

Example

Grace is in the process of applying for a home loan. With an annual income of $90,000 and a deposit of $150,000, she is in a favourable financial position. However, she also carries a HECS debt of $25,000, with no other outstanding debts or credit cards in her name.

When assessing Grace’s loan application, the lender focuses on the impact of her HECS debt on her income rather than solely considering the total debt amount. Given the repayment obligations, Grace is expected to allocate approximately $5,000 annually towards her HECS debt, which the lender views as a significant expense.

Due to this financial commitment, the lender determines that Grace can borrow up to $430,000 for her home loan. Without the HECS debt, her borrowing capacity would have been $480,000, representing a difference of $50,000.

If you have any clients who are concerned about the impact of a HECS debt on their ability to get a loan, have them contact us on 1300 366 296.

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.

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