HECS/HELP Debt and Your Borrowing Power

Understanding HECS/HELP Debt and Its Impact on Borrowing Power

When considering a home loan, many Australians with HECS (Higher Education Contribution Scheme) or HELP (Higher Education Loan Programme) debt may wonder how this obligation influences their borrowing power. Understanding the nuances of this debt can help you make informed decisions about your financial future.

What is HECS/HELP Debt?

HECS/HELP debt is a type of student loan specifically designed to assist Australian students in covering their higher education costs. This debt is unique as it is not considered a traditional loan. Instead, repayments are income-contingent, meaning you only start repaying it once your income exceeds a certain threshold, which is adjusted annually.

How HECS/HELP Debt Affects Borrowing Power

Lenders assess various factors when determining your borrowing power, and your HECS/HELP debt is one of them. Here's how it can impact your capacity to borrow:

• **Debt-to-Income Ratio**: Lenders typically look at your total debts relative to your income. Your HECS/HELP debt is factored into this ratio, which can affect how much you can borrow.
• **Repayment Threshold**: The Australian Government sets a minimum income threshold for repayments. As of 2023, this threshold is around AUD 47,014. If your income exceeds this amount, you will need to make regular repayments, which can impact your disposable income and, therefore, your borrowing capacity.
• **Loan Servicing**: Lenders will assess your ability to service the loan, which includes considering your monthly repayments on your HECS/HELP debt. Although this debt is not a traditional loan, lenders may still include it in their calculations.

Factors That Can Mitigate the Impact of HECS/HELP Debt

While HECS/HELP debt can affect your borrowing power, several factors may mitigate its impact:

• **Stable Employment**: A stable job with a consistent income can enhance your borrowing capacity, making lenders more confident in your ability to repay the mortgage.
• **Strong Credit Score**: A good credit score can improve your chances of obtaining a mortgage, even with HECS/HELP debt. Make sure to check your credit report and address any discrepancies before applying for a loan.
• **Additional Income**: Any supplementary income, such as from investments or a second job, can bolster your application and improve your borrowing power.
• **Savings and Assets**: A solid savings history and assets can compensate for the perceived risk associated with your HECS/HELP debt, enabling you to secure a better loan.

Tips for Managing HECS/HELP Debt While Applying for a Mortgage

If you're planning to buy a home and have HECS/HELP debt, consider the following strategies:

1. Repayment Planning: Understand your repayment obligations and plan your budget accordingly. This will help you assess how much you can afford for a mortgage.

2. Get Pre-Approval: Seek pre-approval from lenders to understand how much you may be eligible to borrow. This can provide clarity and help you tailor your property search.

3. Consult a Mortgage Broker: Engaging a mortgage broker can provide valuable insights tailored to your financial situation. They can help navigate the complexities of borrowing with existing debts.

FAQ: How is HECS/HELP Debt Different from Other Loans?

Question: How is HECS/HELP debt different from other loans when applying for a mortgage?

Answer: HECS/HELP debt is unique in that it is income-contingent, meaning repayments are based on your income level rather than a fixed monthly payment. This is different from traditional loans, where repayments are usually fixed and must be paid regardless of your financial circumstances. While lenders consider HECS/HELP debt in assessing your overall financial profile, they may view it differently than conventional debts, particularly if you are not currently required to make repayments.

Conclusion

Navigating the complexities of HECS/HELP debt while looking to purchase a home can be challenging. However, understanding how this debt affects your borrowing power and taking proactive steps can help you secure the right mortgage for your needs.

If you have questions about your specific situation or would like personalised advice, we invite you to reach out to Timothy Yang at Northmark Finance. Our team is here to help you make informed decisions about your mortgage journey.

*Disclaimer: This article is for general information only and should not be considered financial advice. Always consult a qualified mortgage broker or financial advisor for personalised guidance.*