In Australia, we’re fortunate enough to have options when it comes to paying for tertiary education. Unlike in other countries, upfront fees are not always required. You can opt to take on a HECS (Higher Education Contribution Scheme) debt whereby you pay off your fees gradually.
This debt varies depending on the course and university you attended, as well as how much you earn. Many of us may wonder whether our HECS debt hinders our ability to get a home loan.
HECS debts and home loans
It’s a dream for many Australians to purchase their own homes. With the market continuing to skyrocket, this dream is becoming further out of reach for some – especially first home buyers. As part of your home loan application, lenders will assess your financial position, including any debts you have accumulated.
Your circumstance will affect whether your HECS debt will be a factor in your application, and it can also affect how much you can borrow.
Inovayt Finance Broker, Dimitri Taylor, says, “HECS debt can impact the amount you can borrow once you are earning over the repayment threshold. The ATO will commence wage deductions via your employer, and these payments will be shown on your payslip.”
The repayment threshold Dimitri refers to is the percentage amount that is automatically deducted and put towards your HECS debt. This varies based on how much you earn and changes yearly. For example, if you earn below $47,014, you aren’t required to make repayments on your loan. If you earn between $47,014 and $54,282, you will be required to make a payment of 1.0 per cent of your salary. This is done automatically.
Lenders will assess how much debt you have, as well as how much you earn.
“Effectively, the repayment of the HECS debt is viewed in the same way as other liabilities,” Dimitri says. This affects your borrowing power as it can reduce your available income.
Dimitri advises, “The calculation for servicing must return as low a borrowing limit as possible.”
Although HECS debts are generally seen as a ‘positive’ debt (because they don’t accrue interest), your ability to acquire a home loan may be hindered if you’re unable to service both a home loan and your HECS debt. However, you’d have to be on a knife’s edge for a HECS debt to be a deciding factor.
Read our blog to see how a lender will assess your application.
Paying off your HECS debt
Paying off your HECS debt can be a gradual process, however, there are ways you can pay it back faster. Before choosing any of these options, it’s important to speak to a financial advisor who will be able to provide you with advice based on your situation.
Voluntary repayments – At any given time, you can make voluntary repayments for either the full or partial amount of your loan. It’s important to keep in mind when paying off large chunks of a loan that this money will no longer be available for you to use for a deposit. Speaking to a financial advisor will help you weigh up the risks of paying off your HECS debt early and whether it’s worth it or not. Paying off your loan sooner can potentially open a larger borrowing power for you, but again, it will vary based on circumstance. Whether it’s small repayments on top of your compulsory payments, or larger payments if you come into a bit of extra cash, every bit counts when paying off your loan.
Salary packaging – In some businesses, employees can choose to use salary packaging to pay off their loans sooner. These payments are made in addition to the compulsory payments and will be included in your notice of assessment. If you choose to use salary packaging, your employer may provide a fringe benefit to you. A fringe benefit is a ‘payment’ to an employee, but in a different form to salary or wages. Before entering a salary sacrifice arrangement, it’s important to speak to a financial advisor first.
HECS debt and your financial goals
Your HECS debt is something that is often forgotten, as many of us don’t always read our payslips to see what’s going out and coming in. Because of this, our HECS debt isn’t always top-of-mind like our other debts where we can see deductions from our account on certain dates. Therefore, it’s easily forgotten until tax time or when a new employer asks.
While it’s a debt that sits more in the background than others, it does have the potential to hold you back from achieving your other financial goals. Depending on what these goals are, there’s no easy answer. Sitting down with your financial advisor will allow you to weigh up whether the costs outweigh the benefits, and what solution is best for your situation.
When it comes to paying your loan off sooner, there are ways you can consolidate this debt into pre-existing debts.
Dimitri says, “If you are refinancing your home and you have available equity, you could release some equity to repay your HECS debt. However, consideration must be given to the interest cost this would incur versus the benefit obtained from early repayment of the HECS Debt.
Clearing your HECS debt early can also take a weight off your shoulders, as it doesn’t automatically disappear in the event of your passing. If you pass away, a trustee or executor will manage the compulsory repayments for you. This means you’ll be leaving your loved ones with a new debt they may be unable to pay.
For more information on debt consolidation, head to our blog.
Many Australians have a HECS debt of some size – some are larger than others. Despite this, we don’t often think about them and how they could be holding us back from our financial goals. Lenders look at all types of debt – good and bad – before evaluating whether your borrowing capacity can be increased. If you’re looking to pay off your HECS debt, or talk about your home loan options, get in touch with one of our team today.