For most borrowers, having a HECS-HELP debt doesn't mean your home loan application will be rejected. Because repayments come out of your salary automatically (if you're earning above the income threshold), it doesn't affect your income in the way other debts do.
But your debt is factored into your debt-to-income ratio (DTI). That means your overall debt position relative to your annual gross income before tax. HECS-HELP debt can therefore limit your maximum borrowing capacity, even if it's unlikely to derail your whole application.
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Higher education loans like HECS and HELP don't come with interest charges, and are generally considered your least urgent debts.
Many borrowers (including this author) have no trouble getting their home loans approved despite having HECS-HELP debts. But there's no guarantee your lender won't ask you about your student debt. We've even heard cases where lenders demand applicants pay off their outstanding higher education debt before approving a loan.
You should seek personal financial advice before deciding to pay off a HECS-HELP debt early. And if you have other, interest-charging debts like personal loan or credit card debt, you should usually focus on those first.
When you apply for a home loan your lender examines many things, including your income, assets, debts and expenses. Every lender has different methods for calculating how much you can safely borrow.
One important calculation is your DTI. Your DTI is calculated by dividing your total debts by your annual income. Here's a quick example:
Your DTI is therefore 4.136.
Recently the Australian Prudential Regulation Authority (APRA) informed the lenders it supervises that HECS-HELP debt must be considered when calculating a borrower's DTI. Prior to this clarification it seems some lenders were looking at these debts more closely than others.
Got a big HECS-HELP debt? Before you submit a full application for a home loan, you could ask your lender how much your outstanding debt will hurt your borrowing power.
Every lender has its own standards and lending criteria. Some may not care too much at all, while another lender may have a problem with it.
Mortgage brokers can also help you find a suitable lender in this scenario, as they have a good sense of different lenders' criteria.
If you're worried your HECS-HELP debt could hurt your home loan application or cut your borrowing power drastically, don't panic. There are steps you can take to minimise the effects of your HELP debt and potentially increase your borrowing capacity.
Paying off your least urgent debt (your no-interest HECS-HELP loan) is probably not the first thing you'd do.
Here are some tips to improve your borrowing position:
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