Can You Buy A House With HECS Debt?

For new graduates and young professionals working in Australia, one of the most common goals is to buy a house. But can you buy a house with HECS debt?

As of 2023, nearly three million Australians have a HECS debt, and the average debt balance is around $26,000. Despite this, many Australians are still managing to purchase their first homes or investment properties, proving that having a HECS debt isn’t an insurmountable barrier to homeownership.

It is important to understand your HECS debt and how it impacts your financial situation, but there is no need to be discouraged. There are strategies to successfully become a homeowner, even with this student loan debt under your belt.

Listen to our recent podcast episode in full where we sat down with Julian Khursigara, a highly respected property expert and seasoned real estate investor, and discussed real-life client success stories including a young Aussie professional with HECS debt. 

You will discover practical, actionable strategies to maximise your borrowing power and start your property investment portfolio.  

What is HECS Debt?

The Higher Education Contribution Scheme (HECS) is a loan program provided by the Australian government to assist students in paying for their university education.

As a student, you do not need to pay for your university courses upfront. Instead, the Government covers these costs, and you accrue a debt that is recorded with the Australian Taxation Office (ATO). This gives everyone a chance to gain a higher education, no matter their upbringing or financial background.

HECS debt repayment is then based on your income after graduation. Once your income exceeds a certain threshold, a percentage of your income is automatically deducted to repay your HECS debt. The repayment rate increases with your income, starting from 1% and can go up to 10%.

Buying a House and Student Loans

Understanding the impact of your student loan debt on your finances is crucial when buying a house.

HECS repayments are deducted from your pre-tax income, reducing your take-home pay. This can affect your ability to save for a home deposit and manage other living expenses.

HECS debt does not directly impact your credit score because it is not considered a traditional debt. However, your reduced disposable income might indirectly influence your financial health.

Many people believe that having HECS debt severely limits their ability to get a mortgage. While it does affect your borrowing capacity, it is not a deal breaker. Lenders consider various factors, including your overall financial health, credit history, and ability to manage repayments.

While it affects your financial situation, with proper planning and strategy, buying a house with HECS debt is very achievable.

Assessing Your Financial Position

Begin by creating a detailed budget that outlines your monthly income and expenses. This should include your HECS repayments, rent, bills and subscriptions, groceries, transportation, and other living costs. By tracking your spending, you can identify areas where you might save money to allocate towards a home deposit.

Utilise financial assessment tools and resources to gain a clearer picture of your financial health. Apps like YNAB (You Need A Budget), and our downloadable budget planner spreadsheet can help you keep track of your expenses, savings, and financial goals.

Your Credit Score and HECS Debt

Your credit score is a critical factor in securing a mortgage. HECS debt itself does not directly impact your credit score, as it is not a traditional loan reported to credit bureaus. However, your repayment obligations reduce your disposable income, which lenders consider when assessing your financial stability.

To improve your credit score despite having HECS debt, focus on maintaining a good credit history. Pay all your bills on time, reduce your existing debts like credit cards, and avoid taking on new debt unnecessarily. 

Your Mortgage Eligibility with HECS Debt

Understanding how lenders view HECS debt can help you prepare a stronger mortgage application.

Lenders typically factor in your HECS debt when assessing your borrowing capacity. They look at your overall debt-to-income ratio, which includes all liabilities, to determine if you can manage additional mortgage repayments.

Besides HECS debt, lenders consider your employment history, income stability, savings history, and credit score. Demonstrating a stable income and good financial management habits can positively influence their decision.

Calculate Your Borrowing Capacity

Estimating how much you can borrow is essential for setting realistic expectations.

Use our online calculator to estimate your borrowing capacity. This tool considers your income, expenses, existing debts, and potential interest rates to provide a rough estimate of how much you might be able to borrow.

Strategies for Buying a House with HECS Debt

Saving for a Deposit

Building a house deposit while managing your HECS repayments can seem daunting, but with careful planning, it is definitely achievable.

Start by setting a realistic savings goal and timeline. Automate your savings by setting up a separate account and scheduling regular transfers from your main account. Cut down on non-essential expenses and consider picking up a side hustle to boost your savings. Every little bit helps in building your house deposit.

Take advantage of Government programs designed to assist first-time homebuyers. In Australia, schemes like the First Home Owner Grant (FHOG) and the First Home Guarantee (FHBG) can significantly reduce your deposit requirements. These grants can provide a boost to your deposit or offer guarantees to lower the initial deposit required.

Minimising Your Debt-to-Income Ratio

A key factor that home loan lenders look at is your debt-to-income ratio. Focus on reducing your overall debt. Pay down your credit card balances and personal loans and avoid taking on new debt while you’re saving for a home deposit. By lowering your existing liabilities, you can improve your debt-to-income ratio.

Maintaining a stable income and employment history is also critical. Lenders prefer borrowers who have been in their current job for a significant period (at least 6-12 months), as it indicates more financial stability. If possible, avoid getting a new job or any gaps in your employment during the home-buying process.

Do Student Loans Affect Buying a House? Here is a Real-Life Case Study.

Background

  • Occupation: Daniel is a young dentist living in Brisbane.
  • Initial Investment: Daniel has bought an apartment in Brisbane but it did not have much value growth.

Financial Assessment and Strategy

  • Budget: Daniel had a budget of around $400,000, though he was willing to spend up to $450,000.
  • First Property: Daniel purchased a property in Loganlea, Brisbane for approximately $400,000. Within 12 months, this property appreciated by 20%, increasing its value by about $80,000. Within 18 months it was worth $560,000.
  • Professional Advantages: As a dentist, Daniel benefited from professional perks such as no mortgage insurance for loans with a 10% deposit, saving thousands of dollars.

Second Property

    • HECS Debt Impact: Daniel’s large medical HECS debt did impact his borrowing capacity, but his strategy of looking for more affordable investment properties in up and coming areas like WA mitigated this.
    • Professional Guidance: Using professional advice and support from a buyers agent and broker, Daniel was able to make informed investment decisions looking for opportunities around $400,000 rather than the new build family home. This helped him build a robust property portfolio now to buy the dream home later when he has children.

Future Plans

    • Next Steps: Daniel is considering purchasing a larger property in Brisbane, potentially an emotional investment that he might live in the future. However, he is also enjoying the process of building his investment portfolio and is not in a rush to buy a family home.
    • Continued Growth: With no immediate family commitments, Daniel plans to continue expanding his property portfolio, leveraging his current investments to achieve greater financial growth.

Key Takeaways

    • Strategic Investment: Daniel’s case highlights the importance of strategic property investment and leveraging equity to build a portfolio.
    • Professional Advice: The role of professional advice in making sound investment decisions is crucial.
    • Financial Discipline: Consistent financial discipline and leveraging your available resources can significantly impact your ability to buy a house, even with HECS debt.

The primary lesson is that buying a house with HECS debt is possible with careful planning and financial discipline. Consistent savings, understanding your financial situation, and choosing the right home loan with help from a broker are critical steps.

As a prospective home buyer, you should focus on reducing your non-essential expenses, look at available grants from the Government, and maintain a stable income. It’s also helpful to seek advice from our team of experienced brokers or buyers agents like Julian from Search Party Property, throughout the mortgage application process.

Chat to our team of brokers today to find out how your HECS debt may or may not be impacting your ability to buy or invest in property.Â