Melbourne woman Sosha Jay has $45,000 in HECS debt after graduating with a Bachelor of Commerce in 2021 and completing post grad financial planning studies. (Source: Supplied)
With the cost of higher education and property prices continuing to rise, millions of young Aussies are finding themselves faced with a common dilemma. Should you bite the bullet and prioritise paying off your HECS debt, or focus on saving up for your first home deposit?
It’s a decision 26-year-old Melbourne woman Sosha Jay recently grappled with. The Findex financial adviser and her partner had saved up a deposit for their first home, but were worried about how her $45,000 HECS debt would impact their borrowing capacity.
“I started paying it off pretty much the minute I got my first full-time job in 2021,” Jay told Yahoo Finance.
“My post-grad added a bit onto it. I think it went up to about $50,000 at one point. Then the repayments every year have brought it down to $45,000.”
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After years of saving, Jay and her partner had saved up a 10 per cent deposit between them and were looking to purchase a home with a budget of up to $1.1 million.
Her partner is a chartered accountant and had managed to pay off his HECS debt a few years ago while living at home with his family.
The couple ended up seeking advice from a mortgage broker, who was able to run the numbers to compare how paying off Jay’s HECS debt would impact their borrowing capacity.
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Jay and her partner recently purchased their first home, a $1.08 million townhouse in Pascoe Vale. (Source: Supplied)
“We realised that without paying that HECS debt, we were still able to achieve the budget that we wanted,” Jay said.
“We decided, my partner and I, that we were not going to pay the HECS off and put that money towards the house deposit instead.”
The couple purchased a three-bedroom townhouse in Pascoe Vale for $1.08 million in May, moving in a month ago.
Lenders will generally look at your HECS debt when you apply for a home loan as your repayments are treated as an ongoing expense.
You have to start repaying your student loan once you earn $67,000 and repayments are based on the size of your income.
Finance Society director and mortgage broker Sarah Smelt told Yahoo Finance that banks look at how your HECS debt repayments impact your expenses, rather than the size of your HECS debt itself.
“Let’s just say that you earn $100,000 a year but you’ve only got a $5,000 HECS debt,” she said.
“Even though you only owed $5,000, we would still need to include the full repayment from your $100,000 income.”
Mortgage broker Sarah Smelt said you needed to run the calculations to see if it was worth paying off your HECS to boost your borrowing capacity. (Source: Supplied)
The impact it has on your borrowing capacity will depend on your income and the percentage paid towards your debt each year.
For example, Aussie Home Loans said someone on an $80,000 income with a $10,000 HECS debt would see their borrowing power reduced by about $50,000.
Someone with a $150,000 income and $20,000 debt, would see it reduced by between $90,000 and $130,000.
Smelt said this decision should ultimately be made on a “case-by-case scenario”.
“If you’ve got a $30,000 deposit and you’ve got a $30,000 HECS, then I probably wouldn’t suggest using your whole home deposit to pay off HECS because then you’ve got no deposit,” she said.
In other cases, Smelt said it might make sense to take money from your deposit to pay off your HECS and boost your borrowing power. But she added that generally this applies to people who have $10,000 or less in HECS debt owing.
“My biggest advice is once you’ve paid off that HECS, the money is gone, you can’t get it back. Do not make a decision until you’ve spoken to someone who is educated,” she said.
Financial adviser Alex Jamieson said prioritising your home deposit often made more sense for young people. (Source: AJ Financial Planning)
AJ Financial Planning founder Alex Jamieson told Yahoo Finance it’s a dilemma he is seeing many Aussies face, with parents also weighing up whether they should give their kids a cash gift or pay off a chunk of their HECS.
For a lot of people, he said prioritising a property purchase would make more sense.
“Interest rates are so low on the HECS debt,” he said, while also noting the positive potential of the leverage of borrowing into the property market.
“If you are acquiring an asset that appreciates over time, financially, you’ll be a lot better if we were running the simulations against each other.
“Where you stub your toe is, and I know there have been some exceptions, is around banks looking at HECS debt when they are looking at serviceability.”
Jay said she wasn’t planning on making extra repayments to her HECS debt. (Source: Supplied)
Jay said she views HECS as being a “low-cost debt” and isn’t in any rush to pay it off now that she’s purchased her home.
“Obviously, there’s no interest on that HECS, but there is indexation. If you look at the average of the last five years, taking into account some of the cuts that the government made, it’s averaging at around 2.98 per cent every year,” she said.
“Because it was such a low number, we decided to invest that money elsewhere, such as a house deposit and shares and things like that.
“Maybe our situation will change in the coming years, where a bit of that take-home money that we would get back if we did pay off that HECS we would need. As of right now, we’re not planning on repaying.”
Banks have started relaxing their rules around HECS when assessing home loan applications, but this is still very much the minority of lenders.
Following a request from Treasurer Jim Chalmers, APRA and ASIC updated their guidance in February to allow banks to exclude HECS-HELP debts when calculating serviceability if it was due to be paid off in the “near term”.
Commonwealth Bank now no longer counts HELP debt when it will be repaid within a year, while NAB doesn’t factor in student debts of $20,000 or less when assessing how much buyers can borrow.
Smelt said this was a more “common sense” approach to the debts and would have a “huge impact” on people’s borrowing capacity.
She expects more banks will follow in the next 12 months.
It comes as the government announces 20 per cent reductions to HECS debts will begin flowing through for millions from next month.
A person with an average loan of $27,600 will have around $5,520 taken off their total balance.
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