There are a range of factors that can influence your mortgage application. Why? Because a lender wants one thing and that is to ascertain whether or not you can pay back your loan. That’s the long and short of it and all their considerations about your suitability for a loan will need to answer that question. A HECS debt is just one of many things a bank/lender will look at when assessing you for a loan application.
How a HECS debt affects your mortgage application
Having an unpaid HECS debt does not necessarily disqualify you from having your mortgage application approved but it may have an impact on the amount you can borrow.
Where this might have once played a smaller part in the consideration of a loan application, socioeconomic changes over the past few decades have shifted things so that more people are taking on HECS debts because more people are undergoing tertiary study in Australia, while house prices in major cities have ballooned to a point where many 18-30 year olds today face more pressing concerns of job security, underemployment, sluggish wage growth, entering the workforce later and buying homes later.
Where a 25-year-old a decade or more ago might have applied for a home loan with 50% or more of their HECS debt paid off, lenders are more likely to see those in their early to mid-30s looking at trying to secure a home loan with their HECS debts still weighing heavily over their financial situation.
For these reasons, it is important to understand how your HECS debt is paid off, how this affects your application for a home loan, and how you can improve your ability to not only secure an adequate loan but service it.
How your HECS debt is paid off
The Higher Education Contribution Scheme was introduced in 1989. The fees for tertiary education are paid by the government and then repaid by the individual through the taxation system once they start earning above a determined threshold.
Once you start earning above $45,881, 4 per cent of your gross income is paid to the government to gradually chip away at your outstanding HECS debt, with this rate gradually increasing as you earn more until it is capped at 8 per cent when you start earning $107,214 and above per year.
HECS and your loan
Unfortunately, HECS debts are now a major concern for younger borrowers due to the above-mentioned factors and the expected increase of university fees in Australia by approximately 7.5 per cent by 2022. To combat this, the Federal Government in 2018 lowered the income threshold from when you start paying off your HECS debt.
A survey by NAB and the Centre for Social Impact found that two-thirds of Australian adults feel financially insecure. In 2018, the figure of approximately $85,000 was presented as the average wage in Australia, but this met with a lot of resistance that suggested that the median wage sat more at $44,500. The NAB/CSI survey found that the median wage for those 1,100 people surveyed was A$44,876.
But having a HECS debt does not exclude you from securing a mortgage. A lender will assess your present earnings and your future earning capacity as well as other factors that may point to your ability to both pay off a mortgage and your HECS debt simultaneously.
How you can improve your chances with lenders
The best way to secure a loan with a remaining HECS debt is to demonstrate your control over your finances. First of all, you want to demonstrate your own financial freedom by not having a scrap of ‘bad debt’; that is, debt that does not create wealth in the future. Examples of bad debt are credit cards and car loan repayments. If you are servicing a car repayment scheme for a car that you don’t really need, then sell the car and free yourself of that debt immediately.
Consider every single thing in your life that can offset your HECS repayments: cooking, drinking expenses, food choices, liabilities (credit cards), holidays, etc.
Once you eliminate any other repayments on debt apart from your HECS, you then need to show your lender how you manage your finances. For this reason, it’s important to look at implementing these changes a year or two before you look at securing a loan application. Talk to a financial adviser who can help you prioritise your expenses and give an outsider’s view on where you could save money.
If you want to buy a home and with a sizeable remaining HECS debt, then you may have to make significant sacrifices to your lifestyle: limited travel and very little discretionary spending. For instance: cutting out coffee, weekend breakfasts out, restricting how much you eat out for dinner, limiting how much you spend on alcohol, quitting smoking, using public transport or even riding a bike to save money on transport. All of these things can add up over a year to offset the 4-8 per cent of your income that is going to your HECS and essentially reposition you as a potential mortgage application who is no longer servicing a loan.
For instance, a single $4 coffee each day costs you $1,460 annually. For someone earning $75,000 annually, a 5 per cent cut going to their HECS debt amounts to $3,750. Cutting coffee out from your expenses immediately offsets nearly 40 per cent of your HECS debt repayments.
Finally, draw up a budget. It is the age-old advice that gets absolutely nobody excited but it is pivotal for your understanding of where your money goes each month. Once you figure out what changes you need to make to offset your HECS repayments, you may then start to prioritise what you sacrifice and don’t (cutting out one thing entirely so you can afford a holiday) and realise that you can still enjoy a lot of what you already love to do and still reach that 4 per cent of savings.
