Does Doctor HECS Debt Affect Home Loan Borrowing Capacity?

How HECS Debt Affect Borrowing Capacity for Home Loans

Lenders assess their ability to handle ongoing debts when applying for a mortgage. As such, facilities like mortgages, personal loans, or credit cards can reduce the amount borrowed. 

That said, lenders evaluate your loan application for home loan approval thoroughly. They consider your total income, mandatory expenses, liabilities like car loans, student loans or HECS repayments, and other existing debt.

HECS reduces your available income since it is a compulsory repayment. This reduction affects your borrowing capacity since it directly influences how lenders perceive your ability to repay your home loan on time.

For instance, if you are earning around $200,000 per year as a new doctor, your HECs repayment would be 10% of your income. This equates to $20,000 as your annual obligation. With this, your lenders or mortgage broker will assess your financial situation and see if your home loan borrowing power is enough to cover sensitised home loan repayments after taxable income, monthly living expenses, and existing debts.

In that sense, HECS debt affects your home loan borrowing capacity to an extent. Doctors can consult with a mortgage broker like Mortgage Pros to help determine their borrowing capacity. In the meantime, pay down your other debts, such as credit cards and personal loans, which accrue interest faster than HECS-HELP debt.

What Is HECS Debt?

The Higher Education Contribution Scheme (HECS) or Higher Education Loan Program (HELP) is a loan the Australian Government offers to pay for tertiary education courses for eligible students.

This kind of debt doesn’t accrue interest. It changes based on the cost of living, measured by the Consumer Price Index (CPI). You only have to start repaying it when you earn more than $54,435. Repayments are made through the Australian Taxation Office (ATO), with thresholds and rates subject to annual changes.

You can make voluntary payments to manage your HECS-HELP loan effectively. This boosts your borrowing power and reduces your overall debt. As a result, it improves your perceived risk by lenders, which can lead to better rates or larger loan approvals.

Another strategy to strengthen your home loan application is saving for a larger deposit. A substantial deposit can decrease your loan-to-value ratio, thus increasing your borrowing potential.

How Does a HECS Debt Affect Your Home Loan Application?

HECS debt affects your home loan application in several ways:

Borrowing Capacity

Whether you’re a doctor or a professional in other fields, lenders assess your existing debts when you borrow money, including HECS debt. Higher debts and relatively low income can make it difficult to qualify for a home loan.

Debt-to-Income Ratio

This is another aspect that lenders look into. It is the portion of your income that goes toward your debt repayments. If you have higher debts and relatively low income, it could be hard for you to qualify for a home loan.

Credit Score

Though HECS debt doesn’t directly influence your credit score, some lenders may see it as a factor when reviewing your creditworthiness. High current HECS debt relative to your income could signal to lenders that you are a perceived risk who may default on loan repayments.

Repayment Priority

You must prioritise your repayments when managing your home loan and HECS debt. While HECS loans usually have much lower interest and flexible repayment terms, a home loan carries higher stakes and is secured against your property. Nevertheless, missing payments on any debts may lead to serious consequences, so you need to make a budget accordingly.

Documentation Requirements

If you want a home loan, you might need to show your HECS debt. This means giving the lender information about how much you’ve paid back and what you still owe. Having a HECS debt won’t stop you from getting a home loan, but it can change how much money you can borrow and the terms of the loan. So, it’s important to consider your HECS loan and ensure it fits your overall money plan.

Speak to our senior mortgage brokers at Mortgage Pros for personalised advice. We can help determine the best home loan options for clients with HECS-HELP debt.

2024–2025 Repayment Income Thresholds and Rates Table

Source: Australian Taxation Office (ATO)

HECS Debt and Borrowing Power

How Lenders Assess Borrowing Capacity

Lenders evaluate how much you can borrow by considering various financial factors:

• Income: They check your regular income from jobs, investments, and other sources to ensure you can repay the loan. As a doctor, this may include your salary, consultancy fees, and other medical-related earnings.
• Existing Debts: They consider your current debts, like personal loans, car loans, credit card debts, and student loans (such as HECS). Doctors often have substantial HECS debt due to extended periods of study.
• Living Expenses: They factor in your regular costs, such as rent, utilities, groceries, and other essentials, to determine your disposable income.
• Credit History: A strong credit history and good credit score indicate reliable repayment behaviour, which can increase your borrowing capacity.
• Financial Stability: Consistent employment and a stable financial situation are crucial for lenders. Doctors, with their typically stable and high-earning careers, are often seen as low-risk borrowers. However, if your debts are more than your perceived income, lenders will have to take that into consideration. 

The Role of Debt-to-Income Ratio in Mortgage Applications

The debt-to-income (DTI) ratio is the measure lenders use to assess how much you can borrow. It reflects the portion of your gross monthly income that goes toward paying off debts.

• How It’s Calculated: The DTI ratio is calculated by dividing all your monthly debt payments by your gross monthly income.
• Significance: A lower DTI ratio indicates you have a good balance between debt and income, showing you can handle more debt, like a mortgage. A higher DTI ratio indicates more financial risk, which can limit how much you can borrow.
• Lender Preferences: Most lenders prefer a DTI ratio below 36%. Some are stricter, especially in high-risk lending situations.

Specific Ways HECS Debt Affects Borrowing Power

Even though a HECS loan is considered “good debt,” it still affects your financial profile and reduces your borrowing capacity:

• Increased DTI Ratio: A HECS loan increases your total monthly debt payments, thus increasing your DTI ratio. This makes you appear riskier to lenders and ultimately reduces your borrowing power.
• Reduced Disposable Income: Regular HECS repayments lower your disposable income, leaving less money for mortgage payments. This can lower the amount you can borrow.
• Repayment Obligations: Even though HECS debt repayments are income-contingent and may be deferred until your income reaches a certain threshold, lenders still factor them into your overall debt obligations.
• Impact of Indexation: HECS debt is indexed to inflation, so the amount you owe can increase over time. This can affect your long-term financial planning and borrowing capacity.
• Preparation Tips: Understanding these factors helps you prepare for a mortgage application. Manage existing debts and make a flexible budget to improve your financial profile.

Impact on First-Time Home Buyers

As a health practitioner buying your first home, coping with HECS money owed can still be tough, particularly if you have other responsibilities. However, you may use the following strategies to help balance your HECS repayments while saving in your very own house.

• Income Growth: Physicians can increase their earnings by advancing their careers. This includes acquiring extra qualifications or taking on extra work. Increased income helps you make repayments to HECS faster and increase financial savings, making it easier to cosy a home loan.

• Loan Consolidation: You can consolidate high-interest debts, which include credit cards or personal loans, to decrease month-to-month bills. This approach frees up extra cash for financial savings and may improve borrowing capacity.

• Government Support: You should take advantage of government programs designed for first-time home buyers. These include the First Home Owner Grant or schemes that let you have early access to Superannuation for a home deposit. These applications can provide large monetary help, easing the weight of saving for a home while dealing with HECS debt.

Tips for Improving Borrowing Capacity Despite HECS Debt

You can boost your borrowing capacity despite HECS debt with these strategies:

• Reduce Other Debts: Pay off high-interest debts to decrease monthly payments and improve your DTI ratio.

• Increase Deposit: Save more for a larger home deposit, lowering the loan-to-value ratio (LVR) and compensating for HECS debt.

• Improve Credit Score: Keep a good credit score by paying debts on time and avoiding new credit applications.

• Seek Professional Advice: Get guidance from a financial advisor or mortgage broker specialising in first-home buyers to navigate the property market with HECS debt.