HECS/HELP Debt and Your Borrowing Power

Understanding HECS/HELP Debt

Higher Education Loan Program (HELP) and Higher Education Contribution Scheme (HECS) debts are common among Australian graduates. While these government loans help students pursue their education, they can also influence your borrowing power when applying for a home loan. Understanding how HECS/HELP debt affects your financial situation is crucial for potential homebuyers.

What is HECS/HELP Debt?

HECS/HELP is a student loan scheme that allows eligible students to defer their tuition fees. The debt is repaid through the tax system once your income reaches a certain threshold. As of 2023, the repayment threshold is $47,014, and the repayment rate increases progressively with higher income levels.

How HECS/HELP Debt Impacts Borrowing Power

When lenders assess your borrowing power, they consider your entire financial picture, including your income, expenses, and existing debts. Here’s how HECS/HELP debt fits into this equation:

• **Debt-to-Income Ratio**: Lenders calculate your debt-to-income (DTI) ratio to evaluate your ability to manage repayments. HECS/HELP debt contributes to this ratio, potentially lowering your borrowing capacity.
• **Monthly Repayment Estimates**: Although HECS/HELP repayments are based on your income, lenders often assume a minimum monthly repayment to assess your financial commitments. This can vary, but a general assumption is around 2% of the total HECS/HELP debt.
• **Credit Assessment**: While HECS/HELP debt is not classified as a traditional loan, it still affects your credit assessment. Lenders may view it as a liability, which could influence their decision-making process.

Practical Steps to Improve Your Borrowing Power

If you have HECS/HELP debt, there are several strategies you can employ to potentially improve your borrowing power:

#### 1. Increase Your Income

• **Career Advancement**: Seek opportunities for promotions or higher-paying roles.
• **Additional Income Streams**: Consider side jobs or freelance work to boost your income, which can positively affect your DTI ratio.

#### 2. Reduce Other Debts

• **Pay Down Credit Cards**: Focus on paying off outstanding credit card balances. Reducing your credit card debt can improve your overall financial profile.
• **Personal Loans**: If you have any personal loans, consider paying them down or refinancing to lower monthly repayments.

#### 3. Save for a Larger Deposit

• **Increase Your Deposit**: A larger deposit can reduce the amount you need to borrow, improving your DTI ratio and overall borrowing power.
• **Utilise First Home Owner Grants**: In some states, there are grants and incentives for first home buyers that can help you build your deposit.

#### 4. Speak with a Mortgage Broker

• **Personalised Advice**: A mortgage broker can analyse your specific financial situation and provide tailored advice on how to enhance your borrowing power. They can also guide you through the various loan products available, considering your HECS/HELP debt.

FAQ: How does my HECS/HELP debt affect my home loan application?

Question: Will my HECS/HELP debt stop me from getting a home loan?

Answer: Not necessarily. While HECS/HELP debt can influence your borrowing power, it is just one factor in the overall assessment. Lenders consider various aspects of your financial situation, including income, other debts, and savings. With the right strategies, such as improving your income or reducing other debts, you may still be able to qualify for a home loan.

Conclusion

Managing your HECS/HELP debt is an essential part of preparing for a home loan application. By understanding how it impacts your borrowing power and taking proactive steps to improve your financial situation, you can enhance your chances of securing a home loan.

Every individual’s financial situation is unique, and navigating the complexities of home loans can be daunting. It’s always a good idea to consult with a qualified mortgage broker who can provide personalised advice tailored to your circumstances. They can help you explore your options and find the best path forward in your home-buying journey.

*Disclaimer: This blog post is for general information only and should not be considered financial advice. For personalised advice, please consult a qualified mortgage broker.*