HECS and Your Home Loan
We delve into some significant changes made by the Australian government regarding the Higher Education Contribution Scheme (HECS) and how they impact your home loan application.
What is it?
HECS, or the Higher Education Contribution Scheme, is an Australian student loan program that allows university students to defer their tuition fees until they reach a certain income threshold. These loans are government-backed and indexed annually.
How does it work?
Effective from June 1, 2023, the Australian government has reformed the indexation of HECS loans. Previously, HECS loans were indexed by the Consumer Price Index (CPI). Now, they will be indexed by the lower of the CPI or the Wage Price Index (WPI). This change reduced the indexation rate from 7.1% to 3.2%, providing relief to many students.
Additionally, new guidelines from financial regulators make it easier for Australians with HECS debt to secure a mortgage. Banks can now exclude HECS repayments from serviceability assessments if they expect the borrower to soon pay off their debt. This change aims to help young Australians increase their borrowing capacity for their first home purchase.
Who is it suitable for?
These changes are particularly beneficial for individuals with a small HECS balance and a high taxable income. Banks may exclude HECS from the debt-to-income (DTI) calculation if they expect the borrower to pay off the balance in the short term. However, this is a minor change that will impact only a small subset of borrowers.
For those with a small outstanding HECS debt and a high income, it might be advantageous to pay off the HECS debt completely. Doing so can increase borrowing capacity and eliminate non-deductible interest.
Can I refinance with a HECS debt?
Yes, you can. If you have an existing home loan and a current HECS debt, that can still be factored in as an ongoing commitment. Bear in mind, you can still refinance out. It will depend on your personal income and outgoings, ensuring there is sufficient income on the application. You can refinance out and keep the HECS debt open or, as part of the refinancing process, pay out the HECS debt either via additional funding from the mortgage if there’s equity or using current savings to then free up cash flow.
How will this affect my home loan repayments?
Lenders calculate home loan repayments based on the outstanding debt, separate from your pre- and post-tax income, so an outstanding HECS debt doesn’t directly impact your home loan repayments. The impact will be on your take-home pay. If the HECS debt is paid out using your savings or consolidated through the home loan, you can inform your payroll that you no longer have a HECS liability, reducing the withholding on your pay slip. This means your take-home pay will increase each pay cycle, providing you with more money in your bank account. Subsequently, you can use some of this additional cash flow to make extra repayments on your home loan or save it in your offset account.
Video: HECS and Your Home Loan
Jeremy Harper, Managing Director at Atlas Mortgages, provides a snapshot overview of the latest HECS changes and how it can impact your home loan application.
Click here to book a consultation with Jeremy and explore how these changes could benefit your property strategy.
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Further Information on Australian Expat Mortgages
- Navigating Loan Maintenance as an Australian Expat
- How to Secure a Mortgage as an Australian Expat
- Watch our weekly Expat Chat Podcast on YouTube.
- Listen to our weekly Expat Mortgages Podcast on Spotify.