If you’re a graduate with a HECS-HELP debt, you may be wondering: How much does HECS affect borrowing power when applying for a home loan or investment loan? While the HECS system is designed to help students finance their education, it can have an impact on your financial situation when you try to secure a loan, particularly for major purchases like a home.
In this blog, we’ll explain how HECS-HELP debt affects your borrowing power, how lenders assess it, and what you can do to improve your chances of securing a loan, despite your HECS debt.
What is HECS-HELP?
HECS-HELP is the government loan scheme that helps eligible Australian students pay for their higher education. The loan covers tuition fees for eligible courses, and the amount borrowed is repaid through the tax system once the individual’s income reaches a certain threshold.
The key points of HECS-HELP are:
- Repayment through tax: Repayments are automatically deducted from your income once you earn above a specific income threshold (currently around $47,014 per year for the 2024-2025 financial year).
- Interest-free: HECS-HELP loans do not attract interest, but they are indexed to inflation, meaning the debt increases with the cost of living.
- Repayment structure: The more you earn, the higher your repayments will be. These repayments are calculated as a percentage of your taxable income, ranging from 1% to 10% of your income, depending on how much you earn.
While HECS-HELP loans are generally a low-cost form of debt, lenders consider them as part of your overall financial obligations when assessing your borrowing power for a home loan or investment loan.
How Much Does HECS Affect Borrowing Power?
The effect of your HECS debt on borrowing power depends on several factors, including the size of your debt, your income, and your overall financial situation. While HECS debt is considered a “good” type of debt in the eyes of lenders (since it doesn’t accrue interest), it still affects your borrowing power in the following ways:
1. Lenders Consider HECS Debt as Part of Your Debt-to-Income Ratio
One of the main factors lenders use to assess your borrowing power is the debt-to-income (DTI) ratio. This ratio compares your total monthly debt repayments to your income. A higher DTI ratio means that a larger portion of your income is going towards debt repayments, which can lower your borrowing power.
Although HECS repayments are deducted through the tax system and aren’t as high as other debts, lenders will still factor them into your DTI ratio. For example, if your HECS debt is large, the lender will consider the required annual repayment (which can range from a few hundred to a few thousand dollars depending on your income) as a regular monthly expense, reducing your available income for loan repayments.
- Example: If your HECS debt is $20,000 and your income is $60,000 per year, your HECS repayment could be around $2,000 annually, which is about $167 per month. Lenders will factor this amount into your monthly expenses when calculating how much you can borrow.
2. HECS Debt Reduces Your Available Income for Loan Repayments
Because your HECS debt repayment is automatically deducted from your income once you hit the repayment threshold, it reduces the amount of income available to service other debt repayments. This means that even though the debt itself may not be as significant as a personal loan or mortgage, it still lowers your ability to service a larger loan.
When calculating your borrowing power, lenders will deduct your HECS repayment from your income, which can reduce the total amount of loan you’re eligible for. Essentially, the more you have to repay towards your HECS debt, the less you can borrow for a mortgage.
3. Lenders May Take the Total HECS Debt into Account
In addition to factoring in your monthly repayments, lenders may also take the total amount of your HECS debt into account when assessing your overall financial situation. While this does not directly impact your DTI ratio, some lenders may consider a high total debt as a potential risk factor, especially if your HECS debt is high relative to your income.
For example, if you have an outstanding HECS balance of $50,000 and your income is $60,000, the lender may view this as a substantial debt burden, even though the repayments are relatively low.
4. Government Assistance and Low-Interest Rate Advantage
The fact that HECS-HELP is government-backed and interest-free (other than inflation adjustments) can be seen as an advantage. Lenders generally view this type of debt as lower-risk compared to personal loans or credit card debt, which come with higher interest rates. Because of this, HECS debt may not have as significant an impact on your borrowing power as other forms of debt, such as car loans or credit cards, which carry higher interest rates.
5. Income Increases from HECS Repayments
Since your HECS repayments are tied to your income, an increase in your salary or wages may also increase the amount of your HECS repayment, potentially reducing your borrowing capacity. However, this could also improve your overall financial situation by boosting your income, allowing for a higher potential loan amount, even with higher repayments.
How Can You Improve Your Borrowing Power with HECS Debt?
While HECS debt can affect your borrowing power, there are several strategies you can use to improve your chances of securing a loan:
1. Increase Your Income
A higher income improves your DTI ratio, making it easier for you to borrow more. By increasing your income, whether through a higher-paying job or side hustles, you can increase your borrowing capacity, even with HECS debt.
2. Reduce Other Debts
If you have other debts, such as personal loans, credit card balances, or car loans, paying them off can help increase your borrowing power. Lenders will look at your total debt obligations, so reducing these debts can free up more of your income for mortgage repayments.
3. Consider a Larger Deposit
A larger deposit (ideally 20% of the property value) can improve your borrowing power by reducing the loan amount needed. A larger deposit also reduces the Loan-to-Value Ratio (LVR), which makes you a lower-risk borrower in the eyes of the lender.
4. Speak with a Mortgage Broker
A mortgage broker can help you understand your borrowing capacity and find the best loan options. They can also advise on how to mitigate the impact of your HECS debt on your borrowing power and help you secure a loan with the most favourable terms.
5. Consider Refinancing Your HECS Debt
While HECS debt is non-interest-bearing, if you have substantial personal debts alongside your HECS debt, consider consolidating or refinancing other loans to free up more funds for your property loan.
Conclusion
How much does HECS affect borrowing power? HECS debt does impact your borrowing power, primarily because it counts as a debt repayment, which reduces the income available for servicing other loans. However, because HECS-HELP is government-backed and has lower interest rates, it is generally considered a lower-risk debt compared to others, such as personal loans or credit card debt.
By improving your income, reducing other debts, and increasing your deposit, you can help offset the impact of your HECS debt and increase your chances of securing a loan. If you’re looking to buy a property but are concerned about your borrowing power with HECS debt, it’s a good idea to speak with a mortgage broker or financial advisor for personalised advice.
At Sydney Finance, we can help you understand how your HECS debt affects your borrowing capacity and guide you through the process of securing the right loan. Contact us today for expert advice and assistance.
FAQs
- How does HECS-HELP affect my borrowing power?
HECS-HELP affects your borrowing power because your HECS repayments are considered part of your regular expenses, reducing the income available for loan repayments. - Do lenders consider the total amount of my HECS debt?
Yes, lenders may take the total HECS debt into account when assessing your overall financial situation, although it typically has less impact than higher-interest debts like credit cards. - Can I still borrow a home loan with HECS debt?
Yes, you can still borrow a home loan with HECS debt. However, the amount you can borrow will depend on your income, expenses, and other financial obligations. - How can I reduce the impact of HECS on my borrowing power?
You can reduce the impact of HECS on your borrowing power by increasing your income, paying down other debts, and saving a larger deposit. - Do I need to repay my HECS debt before applying for a loan?
No, you don’t need to repay your HECS debt before applying for a loan. However, lenders will take your HECS repayments into consideration when assessing your borrowing capacity.