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Looking For A Home Loan? Your Existing HECS Debt Might Be An Issue…

Did you know that the government assistance that many people access to pay for their tertiary education can impact the amount of money you may be able to borrow for a home loan?

The Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) has allowed thousands of students to pursue higher education. While repayment of the debt is often something that may not be considered a high priority for fresh graduates, it could impact your borrowing power.

When you ask a bank for a loan to purchase a home, it runs what is called a serviceability test to calculate the level of your income in relation to your current debts and liabilities. Like personal loans, car finance, credit cards or dependent children, a HELP or HECS loan is treated the same way as any other liability.

What Does This Mean For Your Loan?

  • If you’re in a strong position, you should have a certain level of surplus income which means you can qualify for the amount you’re looking to borrow.
  • If your debt to income level is high, the calculation may show a negative surplus, in which case, your borrowing capacity could be restricted.

If your HECS/HELP debt is substantial and included with multiple other loans (e.g. personal car loan, credit card debt, etc), this could create an issue with getting approval for the loan amount requested.

How Can I Minimise My HECS/HELP Debt?

You don’t have to start paying your HECS/HELP debt until you have reached a certain income threshold.

At that point, your rate of repayment will also be set at a fixed point (and you won’t have to pay interest on the debt) by the Australian Taxation Office (ATO), which will withhold a part of your yearly income for the repayments. Your debt will also be adjusted on 1 June every year to account for inflation.

Your HECS/HELP Repayment Income is different from your taxable income. It takes into consideration:

  • Your total income for the financial year
  • Your total net investment losses
  • Any fringe benefits
  • Super contributions
  • Any exempt foreign employment income in the past financial year

There are two ways to pay off your HECS debt. While many people pay back their HECS through their employer as a compulsory payment, some may consider paying it off faster with voluntary HECS debt repayments.

How Can I Improve My Borrowing Power?

Apart from earning a higher income, there are other ways to improve your borrowing capacity or serviceability:

  • Live within your means by cutting out unnecessary spending on luxury items like entertainment and holidays.
  • Cut all unnecessary debts such as credit cards and make extra repayments to pay down existing debts like personal loans faster.
  • Afterpay and similar providers used can also be viewed negatively, so ensure that your spending reflects that you are able to live within your means.
  • Be honest about how much you can afford to borrow and speak to your mortgage broker to crunch the numbers as to how big your mortgage repayments will be.

It depends on your personal circumstances as to how your borrowing power will be affected by existing debts, as not every situation will be exactly the same.

If you’re someone who often finds it difficult to make large lump sum payments for goods or services, you may want to consider looking into “Buy Now Pay Later” services.

Buy now pay later essentially means that, rather than paying in a full lump sum payment for a product or services rendered, there may be an option to pay through instalments of a certain amount over a set period to make the sum of the full amount in total. This method should allow you to pay in full for the product or service without overly straining your finances – you pay back what you can, as agreed upon when you begin the buy now pay later service.

Some popular buy now pay later services include Afterpay, Zip Pay, Brightepay, and some credit card networks such as  Mastercard and Visa, can offer buy now pay later arrangements.

Though it can be a convenient, immediate solution, it may be challenging to juggle the necessary repayments with other financial commitments. It’s not always the most appropriate method for people, and you should bear in mind your situation and ability in paying back the amounts. 

Before you sign up, keep in mind: 

  • It becomes easier to overspend with buy now pay later services, so know your limits on what you can and can’t afford.
  • You will be charged fees and costs to use the service, which can add up to a princely sum in and of itself.
  • Keeping track of your payments can be tricky if you’ve signed up for multiple services.
  • It could affect your loan applications for a car or mortgage as lenders consider buy now pay later spending just as much as your credit score.
  • Late repayments can appear on your credit report, which affects your ability to borrow money in the future.
  • Layby can be a cheaper alternative to buy now pay later, with no account-keeping or late fees to consider

If you are someone who could make use of BNPL services, you may wish to:

  • Ensure that when using the BNPL service, you stick to a set limit on what you spend so that you can comfortably pay it back later. 
  • Aim only to have one BNPL account at a time to manage payments through, rather than confuse yourself with multiple payments across different providers.
  • Always budget for bills, loan payments and BNPL payments, and 
  • Rather than use your credit card for payments to your BNPL account, consider linking to your debit account instead.

If you would like assistance in planning your financial future, help in managing your budget or some friendly advice, see us for a chat about what we can do for you.


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John Briggs

Jane Noller has been my accountant for the last 15 plus years. I can testify to Jane’s professionalism and expeditious manner in dealing with the day to day issues that surrounds our business accounting.

John Briggs

Registered Building Certifier