The impact of university debt on borrowing - Mortgage Domayne

The impact of university debt on borrowing

May 20, 2023

Welcome to the finance update for the week ending 20 May, 2023.

A pretty quiet week on the home loan news front this week, which isn’t necessarily a bad thing! Most lenders have now formally upped their variable interest rates off the back of the RBA announcement earlier this month.

Whilst not related to home lending, it was with interest that I read during the week that the number of Australians who are relying on their phone or wearable instead of their card or wallet to make payments has doubled in three years – from 19% in 2019 to 38% in 2022. There were many who doubted the use of physical cards would abate to any great extent, I guess they have now been proven wrong.

In this week’s newsletter, we explore the impact of the government funded student loan program HECS on borrowing capacity, especially relevant now that HECS debts will be indexed upwards by 7% this year.

What is HECS debt?

For those who can’t afford to pay university fees upfront, HECS is a government funded scheme that assists eligible students to pay their student contribution amount with a loan.

People with a HECS debt are required to begin paying it off at one per cent of their income once they earn more than $48,361, Those on $141,848 and beyond pay 10 per cent of their income – the highest rate.

The problem with HECS for borrowers.

HECs debts can lower prospective buyers’ borrowing capacity by tens of thousands of dollars, analysis has found, with experts warning rapidly approaching indexation of around 7 per cent will further complicate matters for savers.

According to research by Futurity Investment Group, the average student HECS debt in Australia is $22,636. However, the ATO has found that some debts soar into several hundreds of thousands of dollars.

And while these loans don’t technically accrue interest, indexation is applied every year on June 1, in line with changes in the consumer price index (CPI).

As inflation has increased, so has indexation, climbing from 0.6 per cent in 2021 to 3.9 per cent in 2022 and to an anticipated 7 per cent in 2023. Indexation of 7 per cent means someone with a $20,000 HECs debt would have an extra $1400 added to their loan this year.

To put the impact of HECS debt on borrowing capacity into perspective, someone earning $100,000 a year would technically be able to borrow up to $530,000 if they had no debts, based on a 5.50 per cent interest rate and 3 per cent serviceability buffer.

But if they had a HECs debt, and were required to funnel 7 per cent of their salary towards paying off that debt, they’d only be able to borrow $450,000 – a difference of $80,000 – which could prove to be a dealbreaker for those looking to buy their first home.

If you have a client with a HECS debt who would like to better understand the impact of the debt on their borrowing capacity, have them call us on 1300 366 296.

Any changes in interest rates from last week are highlighted in orange.

Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.

Standard 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.