The impact of student loans when buying a home
For many Australians, particularly young Australians, the dream of home ownership is often accompanied by the reality of carrying student loans, known as HECS-HELP debt. Understanding the impact of HECS debt on your ability to secure a home loan can help you plan for and navigate the home loan process.
Case Study
Sarah, is a 32-year-old marketing professional from Melbourne. She has a stable job with a steady income and has managed to save a decent deposit for her first home. However, like many Australians, Sarah carries a HECS debt from her university education.
What is HECS-HELP debt?
HECS-HELP is a loan offered by the Australian government to pay for studies at a university or approved higher education provider. Once a person earns above the compulsory repayment threshold, loan repayments are automatically deducted from their pay through the ATO. There is no interest on the loan, but the debt is annually indexed against inflation.
Sarah’s Home Loan Goals
Sarah’s goal is to purchase a two-bedroom apartment close to the city. She is aiming to take out a $450,000 home loan, considering her savings and the property prices in her desired area. Sarah is concerned about how her HECS debt will affect her home loan application and how she can maximise the amount she can borrow.
The Application Process and the Impact of Student Loans
When Sarah approached a mortgage broker to discuss her home loan options, she learned that her HECS debt, while interest-free, would still impact her borrowing capacity.
Sarah’s potential lenders must consider her ability to meet all financial obligations, including her HECS repayments. This could potentially lower the loan amount Sarah qualifies for, as lenders assess her debt-to-income ratio.
Strategies and Solutions
Sarah’s mortgage broker advised that there are several strategies she can consider to enhance her borrowing capacity despite her student debt:
- Pay off the HECS-HELP loan: Sarah may be able to borrow more if she were able to erase the HECS debt.
- Reduce other debts: clearing or minimising other debts, such as credit card balances or personal loans, would improve Sarah’s debt-to-income ratio.
- Consider government grants or incentives: Sarah could still apply for government assistance such as the First Home Owner Grant or the First Home Loan Deposit Scheme, even with HECS debt.
- Increase her deposit: by saving more and increasing her deposit, Sarah could reduce the loan amount she needs.
- Choosing the right lender: different lenders have varying policies regarding HECS debt. Choosing a lender more lenient towards student loans can enhance her chances of approval.
Outcome
By proactively managing her finances, seeking professional advice, and implementing strategies to manage her HECS debt, Sarah was able to strengthen her home loan application. She successfully secured a home loan with a competitive interest rate, allowing her to purchase an apartment within her parameters.
The impact of student loans on home loan applications is a significant consideration for many young Australians. But the good news is that there are steps you can take to minimise the impact of HECS-HELP debt. Doing so enhances the chances of securing a home loan, and empowers you to make informed decisions on your financial journey. Reach out to us today and take the first step towards home ownership!
