Do HECS-HELP debts affect your home loan borrowing power?

author-avatar By on August 16, 2021
Do HECS-HELP debts affect your home loan borrowing power?

If you have a higher education debt, chances are it could affect how much you could borrow for a home loan.

There are a lot of people with a lot of Higher Education Loan Program (HELP) and Higher Education Contribution Scheme (HECS) debt in Australia. According to the Australian Tax Office (ATO), there were 2.9 million people with outstanding HELP debts in the 2019/20 financial year - totalling nearly $66.4 billion. The average debt was $23,280, with 24,544 people having debt in excess of $100,001.

Outstandinghelpdebt.png

Source: ATO

If you want to buy a property, a HELP debt could minimise your borrowing power. Find out why, by how much, and what steps to take moving forward.


What is HELP debt?

HELP is a government subsidised loan program, encompassing HECS and other costs incurred from attending university and higher education institutions. To take advantage of the program you need to be either an Australian citizen, a New Zealand Special Category Visa (SCV) holder, or a permanent humanitarian visa holder. You also need to have a Tax File Number (TFN) and be enrolled in your courses by your institutes' census debt.

You don’t have to pay off your HELP debt until you hit a certain threshold, $47,014 at the time of writing, and the percentage you have to pay off increases as you move up the income brackets. You can see the brackets in the table below.

HELP repayment rates and thresholds from 1 July 2021 for 2021/20

Repayment income

Repayment rate

Below $47,014

Nil

$47,014 to $54,281

1.00%

$54,282 to $57,538

2.00%

$57,538 to $60,991

2.50%

$60,992 to $64,650

3.00%

$64,650 to $68,529

3.50%

$68,529 to $72,641

4.00%

$72,641 to $77,000

4.50%

$77,000 to $81,620

5.00%

$81,620 to $86,518

5.50%

$86,518 to $91,709

6.00%

$91,709 to $97,212

6.50%

$97,212 to $103,044

7.00%

$103,044 to $109,226

7.50%

$109,226 to $115,678

8.00%

$115,678 to $122,728

8.50%

$122,728 to $130,091

9.00%

$130,091 to $137,897

9.50%

$137,897 and above

10.00%

Source: ATO

You’ll need to let your employer know you have a HELP debt, and they’ll set aside additional tax from your pay to cover the estimated repayment.


Does HELP debt affect home loan borrowing power?

HELP debt, just like any other debt, does affect your borrowing power. Borrowing power is the amount of money a lender will let you borrow from them to purchase a property.

Using Savings.com.au’s borrowing power calculator, you can get a rough idea of the effect a HELP debt could have on your borrowing power.

If you were on an income of $75,000 and wanted a home loan repaid over 30 years at a rate of 3.5%, you could borrow up to $554,890 (please note this is an estimation - your borrowing power will vary between lenders).

Now let’s add a HELP debt, using the average debt previously mentioned of $23,380. With an income of $75,000, you’d be required to pay 4.50% of the debt a year. That's $3,375, or a monthly commitment of $281.25. As a result, your borrowing power could fall to $503,900, taking $50,990 off what you could borrow if you didn’t have the HELP debt.

Let’s look at another example if you had a greater income.

If you were on an income of $100,000, again wanting a home loan at 3.50% over 30 years, you’d have a borrowing power of $740,560.

If you then had a HELP debt of $50,000, you’d be required to pay of 7.00% the balance a year. That’s $7,000 a year, or a monthly commitment of $583.33. As a result, your borrowing power would fall to $634,810, taking $105,750 off what you could borrow if you didn’t have the HELP debt.


Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
VariableMore details
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^

Rates correct as of October 23, 2021. View disclaimer.


Should I pay off more of my HELP debt to improve my borrowing power?

HELP debt is often referred to as the cheapest debt you’ll ever have. This is because your balance is indexed with inflation, which has been at record-low levels for years and isn’t expected to rise for many more. For the 2020/21 financial year, the HELP indexation rate was 0.6%, one of its lowest ever points as Australia experienced deflation last year.

As a result of this cheap debt, it's often recommended you pay off any other debts you have before going near your HELP debt. These other debts are likely to have a far greater interest rate than what inflation sits at, so paying these off first can typically save you money on interest costs.


How to improve your borrowing power

If you have a HELP debt and want to improve your borrowing power, here are some of the ways to do so:

Set up a budget

Creating a budget can improve your borrowing power in a number of ways. A budget can give you a better idea of your finances, your incomings and outgoings, and help you to improve your financial behaviour. Lenders like to see a history of good financial behaviour, often trawling back six months and more to see how you manage your money. If the lender likes what it sees, your chances of approval should improve, while also improving your borrowing power.

Cut back expenses

Cutting back on expenses can be great way to save money and also improve your borrowing power. Non-discretionary expenses like insurance, car registration, and rent are typically hard to cut back on, but discretionary spend like going out for dinner and drinks, unused subscription services, and spending on clothes are all things that can easily be pulled back if you want to borrow more money.

Pay down debts

Having outstanding car loans, personal loans, credit card debt, and buy now, pay later debt can drastically reduce your borrowing power. Paying these down as much as possible, as well as making compulsory payments on time, in full, can all improve your image from a lenders' point of view.

Reduce credit limits and cancel cards

A large credit limit on an active credit card, even if you don’t have any debt on it, can be a red flag for a lender. Reducing your limit from $30,000 to $10,000 can be a great way to improve your borrowing power while cancelling the card all together is even better.

Avoid buy now, pay later and payday loans

Buy now, pay later and payday loans are both considered a form of credit and are viewed unfavourably by lenders. Payday loans are in many cases also fraught with danger, sporting extortionate fees and interest rates. Avoid these products where possible to avoid your borrowing power taking a hit.

Increase your income

Far easier said than done, increasing your income, in turn, increases your borrowing power. You could ask your current employer for a raise or look for alternative ways to increase your income through a side hustle.


Photo by Redd on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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