How HECS Debt Can Affect Your Home Loan Application?
Understanding how HECS-HELP debt impacts your ability to secure a home loan is crucial for any prospective homeowner. This article explores the effects of HECS debt on your loan application and offers practical tips to enhance your borrowing power.
How HECS Debt Can Affect Your Home Loan Application
HECS-HELP debt is often called ‘good’ debt because it’s an investment in your future. Unlike most debts, it doesn’t have interest. However, it is adjusted for inflation every year. This adjustment happens on June 1 and is based on the consumer price index.
Recent Changes in HECS-HELP Debt
For ten years up to 2022, inflation was low, and the average indexation or increase in HECS-HELP debt was about 2.0%. But this year, it went up by 7.1%. This means if you had:
Â
- $10,000 in HECS debt, it grew by $710
- $25,000 in HECS debt, it grew by $1775
- $50,000 in HECS debt, it grew by $3550
How Lenders View HECS-HELP Debt
When you apply for a home loan, lenders look at all your debts, including HECS-HELP debt. They check if you can afford the loan. This recent increase in HECS debt can lower your borrowing power, but it won’t affect your credit score.
How HECS Debt Impacts Your Borrowing Power
The amount you repay for HECS-HELP debt depends on your income. Lower incomes pay 1% of their income, while higher incomes pay up to 10%.
Â
For example:Â someone earning $100,000 with $10,000 in HECS debt will have higher repayments than someone earning $60,000 with $100,000 in HECS debt. So, the more you earn, the bigger the impact on your borrowing power.
2024–2025 repayment income thresholds and rates
Repayment income (RI) thresholds | Repayment rate (% of repayment income) |
|---|---|
Below $54,435 | Nil |
$54,435-$62,850 | 1.0% |
$62,851-$66,620 | 2.0% |
$66,621-$70,618 | 2.5% |
$70,619-$74,855 | 3.0% |
$74,856-$79,346 | 3.5% |
$79,347-$84,107 | 4.0% |
$84,108-$89,154 | 4.5% |
$89,155-$94,503 | 5.0% |
$94,504-$100,174 | 5.5% |
$100,175-$106,185 | 6.0% |
$106,186-$112,556 | 6.5% |
$112,557-$119,309 | 7.0% |
$119,310-$126,467 | 7.5% |
$126,468-$134,056 | 8.0% |
$134,057-$142,100 | 8.5% |
$142,101-$150,626 | 9.0% |
$150,627-$159,663 | 9.5% |
$159,664 and above | 10% |
Note repayment income (RI) is taxable income plus any total net investment loss (which includes net rental losses), total reportable fringe benefits amounts, reportable super contributions and exempt foreign employment income. More info can be found on the ATO website.
Should You Pay Off HECS Debt Before Applying for a Home Loan?
It might be smart to pay off your HECS debt before applying for a home loan, especially if you owe a small amount, earn a good income, and have savings. But it’s important to run the numbers with a mortgage broker.
Â
In some cases, using your savings for a bigger home deposit might be better. This can lower your loan-to-value ratio below 80%, helping you avoid lender’s mortgage insurance and get a better interest rate.
Key Tips
- Know Your HECS Balance: Check your HECS balance regularly through the HECS-HELP portal, myGov, or by contacting the ATO.
- Reduce Other Debts: Pay off other loans to increase your borrowing power and appear less risky to lenders.
- Save for a Bigger Deposit: A larger deposit can lower your loan-to-value ratio, increasing your borrowing power.
- Look for Government Grants: Check if you’re eligible for any home buying grants or incentives to help with your purchase.
Understanding how HECS debt affects your home loan application can help you make better financial decisions and improve your chances of getting the loan you need.
