As if the cost of living and higher interest rates weren’t enough for prospective home owners to worry about, this with a HECS- HELP loan will have to consider a debt increase following the recent announcement that the indication on student loans in Australia is set to increase to around 4.7-4.8 percent.
The consumer price index (CPI) which determines how much HECS-HELP and all other student debt increase under the annual indexation that takes place on June 1, and with inflation data just released, we are now looking at the second highest figure since 1990.
What does this mean for people with HECS-HELP debt?
As for the roughly 1 per cent of student debtors who still have $100,000 or more to pay back, they’ll see their debt increase by at least $4700.
As for the roughly 1 per cent of student debtors who still have $100,000 or more to pay back, they’ll see their debt increase by at least $4700.
Will my HECS debt impact my borrowing power?
While it’s obviously concerning to you that you have increasing debt through no fault of your own, the short answer is probably not, as a HECS debt is considered amongst a range of living expenses and other liabilities that may impact how to repay your loan.
The truth is that most Australians are sometimes well into their 40’s before they can start making a real dent into paying off their education. In this case, lenders are more concerned with your income and ability to service a loan, a part of which includes scrutinising your existing debt obligations.
The other thing to consider is that you won’t start paying off your HECS debt until you start earning more than $51,550 per year. At that time, a percentage of your wage is deducted and reallocated to cover your student loan. It then increase by 0.5 per cent for every $4000-5000 more you earn per year. As an example, if you earn between $66,876 and $70,888, 3.0 per cent of your salary goes to HECS.
The highest rate is 10 per cent and that’s for people earning over $151,201 a year.
So, unlike a home loan, your repayments aren’t based on how big the HECS debt is and it’s simply reflective of how much you earn, and that’s why your income is far more important when it comes to getting a home loan.
How much will my HECS debt increase by?
HECS indexation is expected to be 4.7 per cent. Check how much extra you could be paying with this calculator.
What do banks consider when deciding how much you can borrow?
When applying for a loan, lenders will consider and analyse at least the previous three months of household expenditure, looking for any red flags that might put you in a high risk category.
Lenders will:
- Use the Household Expenditure Method (HEM) based on your family size and income
- Ask you to complete a self-assessment of your living expenses on your home loan application
- Review any bank or credit card statements they have access to in order to confirm your self assessment and accept or adjust the expenses accordingly
- Take the higher of the above living expense assessment methods to calculate your living expenses.
In addition to this, banks will cross-check this with whether you’re living in a metro area versus a non metro area for each state.
Should I pay off my HECS debt if I have lots of money in savings?
HECS debt goes through an annual indexation, so the debt amount is adjusted with inflation.
This amount is calculated from the consumer price index (CPI) and it’s set to go up by between 4.2 to 4.8 per cent on June 1. Aussies with student debt have seen their loan indexed between 15.95 per cent and 16.62 per cent in the last three years, which equates to around $12.3 billion.
For some, this means their debt is growing, not shrinking with repayments.
If you had some savings, you might be tempted to throw it at your student debt. But it might work out better for you to avoid that unless your HECS debt is less than roughly $10,000. If you’re looking to get a home loan, use that money to go toward your deposit instead.
We recommended speaking to a mortgage broker about your goals before making any decisions about what to do with money you could potentially use to get on to the property ladder.
Please contact us today to make an initial appointment to go through what you can afford and cover off any other questions you might have about getting approved for a home loan.
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.
