If you attended university to get your degree, you most likely have a HECS Debt hanging over your head and asking yourself the question “what should I do”? This article will hopefully bring light to HECS Debt and how it will impact your home loan application.
Higher Education Contribution Scheme (HECS) is a government backed lending scheme in Australia which loans eligible students money so they can attend university. It’s interest free, however as you’ve likely seen in the news lately the amount is indexed every June based on the Consumer Price Index (CPI), which was 7.1% in 2023. The first thing to emphasize is that unlike other ‘debts’, when HECS increases the annual repayment will remain the same. This is because the repayment percentage is based on your annual income:
You may be thinking “I’ve never had to directly pay my HECS Debt” and that is essentially true, but this is because the repayment is taken out of your payslip automatically (for standard PAYG individuals). For self-employed individuals they will have to manually make the payment when it’s tax return time.
What should I do with my HECS Debt?
There are really only two options with what to do with your HECS debt and that’s 1) leave it and pay over time or 2) make a lump sum payment to it. To determine which option, it comes down to the client’s personal situation (income, expenses, etc.), their goals and what they’re after (property price). I will show a few examples below of different scenarios revolving around an existing HECS Debt (all names and figures are used for illustrative purposes):
Scenario 1 – ‘Jack’ Purchasing his First Property
Jack is a First Home Buyer (who is eligible for the government’s First Home Guarantee) who is looking to purchase a $500,000 unit. A bit of background into Jack’s situation:
Has $30,000 in savings which can be used towards the purchase of property (retaining a comfortable balance as a ‘rainy day fund’)
Has an income of $120,000
Has no existing debts and lives a moderate lifestyle resulting in strong savings pattern
Has a HECS Debt of $55,000
As Jack is earning $120,000 p.a. his annual HECS repayment is $9,600 and he asked if he should put some of his home deposit towards his HECS Debt. I showed Jack the following scenario with regards to a $500,000 property purchase:
As Jack is a First Home Buyer eligible for the government scheme, he only requires a 5% deposit (when considering the hidden costs in buying property). As seen from the above, Jack’s $30,000 in savings only just covers the deposit & costs of a $500,000 unit (94.78% overall LVR). So, in this scenario I informed Jack that if he was going to use some of his deposit to pay down HECS then he wouldn’t have sufficient funds required to complete the unit purchase (without paying LMI). This would be an example of where if Jack wants to get the unit he wouldn’t use his surplus cash to pay down a portion of his HECS Debt.
Scenario 2 – ‘Sarah & Tim’ Purchasing their First Property
Sarah & Tim are First Home Buyers looking to buy an $1,000,000 property which makes them ineligible for the First Home Guarantee scheme (as it's capped at $700,000) so they would therefore need a 20% deposit to avoid Lenders Mortgage Insurance (LMI). A bit of background into Sarah & Tim’s situation:
Sarah & Tim have savings of $200,000 (recently received an inheritance) & $120,000 respectively which can be used towards the purchase of property (retaining a comfortable balance as a ‘rainy day fund’)
Sarah & Tim have incomes of $120,000 & $130,000 respectively
Have no existing debts and they live a moderate lifestyle resulting in strong savings pattern
Sarah has a HECS Debt of $22,000 (Tim has no HECS Debt)
As Sarah is earning $120,000 p.a. her annual HECS repayment is $9,600 and she asked if he should put some of her savings towards her HECS Debt. I showed Sarah & Tim the following scenario with regards to a $1,000,000 property purchase:
I told Sarah & Tim that they would need approx. $236,692 to cover the deposit & upfront costs involved with purchasing a $1,000,000 property. As they currently have $320,000 in savings and only need a minimum of $236,692, I told Sarah that if she wanted to pay the $22,000 HECS Debt then it wouldn’t impact her ability to purchase the property. However, an important consideration is what if they put the extra $22,000 into reducing the loan amount, instead of paying off HECS:
Scenario 1 – Fully pay $22,000 owing of HECS
Loan Amount – $800,000
Monthly Repayments – $4,796.40 (assume 6% interest rate)
Monthly HECS Saving – $800 ($9,600 p.a.)
Total Monthly Repayment – $3,996.40
Scenario 2 – Leave HECS Debt & Use $22,000 to Pay down Loan
Loan Amount – $778,000
Monthly Repayments – $4,664.50 (assume 6% interest rate)
Monthly HECS Payment – $800 ($9,600 p.a.)
Total Monthly Repayment – $5,464.50
As seen in this instance for Sarah & Tim it'd be worth using the $22,000 they have in savings to pay off Sarah’s HECS Debt as the $9,600 p.a. payment goes straight back into their pocket. Sarah & Tim are obviously in a very good position and not every applicant has the luxury of having funds in cash to pay down their HECS Debt, but the above is an illustration of how paying down your HECS Debt vs reducing your loan can be beneficial (if in the luxurious position to do so).
Do all lenders treat HECS the same?
Without going into too much detail, the short answer is no, they don’t all treat it the same. Every lender has slightly different policies, and as a result, some are more friendly towards assessing HECS Debt when compared to others. A mortgage broker can add real value to your borrowing power by knowing how each lender assesses HECS Debt.
In summary, everyone’s situation is different and as a mortgage broker I can help you fully understand your position and borrowing power. Want to determine your borrowing power? Contact myself on 0401 225 713 or lmckean@lbkprivatelending.com.au