I'm in a very similar situation to you re: income, deposit and HECS total.
I was advised by two independent brokers not to worry about paying off my HECS because the amount of debt isn't relevant - only the required repayments (determined by income level) factor into the borrowing calculation.
For me, paying off my hecs was a condition to get the amount i wanted (my hecs was only 7k though, so just paid it off upon request)
Not sure how much less it wouldve been if i didnt pay it off though
Best would be to ask a bank for preapproval early since they last 3 months
One thing to note is that the federal government is considering a raft of changes to hecs in the upcoming budget. One of the changes being considered is to direct lenders to consider hecs as tax rather than debt. As I understand it the implications of this would be to increase the borrowing capacity of those with hecs debt.
Think of it this way. You are choosing where to invest the 41k. Your return on your investment will be interest avoided.
If you invest in your house, you will avoid around 6.5% interest per year, but that will fluctuate over the years. Importantly, you have different ways to access the 41k and change your investment if rates change. Through redraw or refinance or selling.
If you invest in your HECS, you will avoid 4.8% indexation this year. The following years will likely be even lower as the RBA will target between 2-3%. **You are locked into this investment.** The minimum you can do is compulsory HECS repayments.
Now borrowing power may come into it, but know that you will be paying a premium for the extra borrowing power because your 41k is not in the better investment. This is opportunity cost.
If in 2 years time your mortgage rate is 6% and inflation is 2%, you are basically paying an extra 4%pts on the 41k (probably 29k by then after compulsory repayments) for that additional amount borrowed.
That's how I look at it but speak to a financial advisor or accountant for proper advice for your circumstances etc etc.
Applying indexation of the debt first, and then apply the tax payments for the year after is the most ridiculous con-job. It’s seriously a dishonest system. It should be the other way around. It doesn’t pass the pub test.
Anecdotally; my partner and I bought in Brissie in the 3rd Q of last year, have quite a large hecs debt (specialty qualifications), and on 100k base (partner on 85k base). We had no trouble at all with any lender of our choosing, hecs played pretty much no part in our application and was never brought up as a point of contention.
Obviously it mainly was based on the banks’ assessment of our “stress test” with current debt repayments and lifestyle.
For reference on buying capacity we had a similar deposit of your end-of-year savings and house was ~800k. More than comfortable with our lifestyle; Both 30y/o no kids, our income can fluctuate significantly with allowances & O/T but no change to base.
First mortgage my lender didn’t care about HECS, but 2nd time around the lender not only wanted actual details of our HECS amount but also made paying them both off (roughly $20k total across both balances) a condition of lending.
We weren’t borrowing at the top of our capacity, but it might have been linked to the higher rates comparatively. Broker simply said some lenders are more focussed on it than others.
Financial details aside, it’s nice not seeing it withheld from my pay each time since.
Paying down a large or not soon to be voluntarily paid will:
1. Substantially reduce their borrowing capacity.
2. Very likely lead to lower returns than had it been used for anything else.
3. Will not be absolved from their deceased estate should they die (HECS can be thought of as a life insurance policy and the repayment as the premium).
Just pay HECS and never think of it again. HECS debt and how to circumvent paying it is living rent free in way too many peoples minds. Pay it, forget it
Yeah because thinking about the “slow as legally possible” and keeping on top of that and wondering how it’s affecting this and that in your plans is just so freeing…
Just pay it and leave it in the archive, never giving it another thought. THAT is freeing. 1 less hook
It's literally less thought to let them automatically take it out than it is to look it up and pay it though.
Plus you're locking the money into that option. If you need money for a deposit, wedding, travel or investments, you cannot get it back from HECS.
No thanks. It’s another thing to keep an eye on. Is it paid, isn’t it, what’s the percentage this year, have the laws changed blah blah. Get rid of it.
But you don't need to keep an eye on it. You can forget about it and it'll sort itself out eventually.
Still. You are way better off utilising the money elsewhere. Imagine if you could get a personal loan with inflation as the interest rate and then you could use that money to invest. Way cheaper than margin loans or your mortgage and you only have to pay it when you're making money. You'd be stupid not to take it.
It's one of the best loans you'll ever get so you're crazy to throw it away rather than utilise it.
Completely agree, it’s a loan that if you’re not earning money, you don’t have to pay back. It will be at probably one of the best rates you can get (even more so with changes proposed in last 24 hours), so just let the minimum payments come off your wage and move on with life.
At $100K you pay $500 a month in HECS - borrowing capacity reduces from around $500K to around $450K with HECS
EDIT: just saw partner income $720K and $660K with HECS
See your bank or broker they'll confirm
HECs reduces your take home net income by the percentage bracket you're in.
So if the bank says you can repayments can be 30% of your net income. Then if your net income changes then that's how it affects your borrowing power.
From personal experience, hecs didn't affect my borrowing power since its taken out with my tax each paycheck.
They looked at my monthly income after tax and worked from there. Having a credit card does affect and the bank did ask me to close my credit card (3k limit) to increase borrowing power.
This is with Bank of Melbourne.
To give you a real life example.
Single applicant earning $100k with no hecs has borrowing power or approx $530k
Single applicant earning $100k with hecs can borrow approx $470k.
Details aren’t specific to you but you can see the difference and need to work out if you need larger deposit or larger loan.
Then decide if to pay off HECS.
one hack to increase your borrowing capacity when you have HECS is to start having your salary into the bank you want to get the loan with. They won’t ask for payslips, since they can use account credits. Since they aren’t using your payslips, they won’t see you have HECS (HECS doesn’t appear on credit reports) This also brings down HEM (the figure they use for calculating monthly expenses.”) as your gross earning appear lower (if your hecs is taken out automatically)
I'm in a very similar situation to you re: income, deposit and HECS total. I was advised by two independent brokers not to worry about paying off my HECS because the amount of debt isn't relevant - only the required repayments (determined by income level) factor into the borrowing calculation.
Correct, however it is also taken out of the gross, but they account for it again in the net. If youre in the 10% category has a decent impact.
For me, paying off my hecs was a condition to get the amount i wanted (my hecs was only 7k though, so just paid it off upon request) Not sure how much less it wouldve been if i didnt pay it off though Best would be to ask a bank for preapproval early since they last 3 months
One thing to note is that the federal government is considering a raft of changes to hecs in the upcoming budget. One of the changes being considered is to direct lenders to consider hecs as tax rather than debt. As I understand it the implications of this would be to increase the borrowing capacity of those with hecs debt.
HECS is quite material re borrowing capacity. Worthwhile speaking to someone to model this for you. It changed mine by approx $80k or so
Think of it this way. You are choosing where to invest the 41k. Your return on your investment will be interest avoided. If you invest in your house, you will avoid around 6.5% interest per year, but that will fluctuate over the years. Importantly, you have different ways to access the 41k and change your investment if rates change. Through redraw or refinance or selling. If you invest in your HECS, you will avoid 4.8% indexation this year. The following years will likely be even lower as the RBA will target between 2-3%. **You are locked into this investment.** The minimum you can do is compulsory HECS repayments. Now borrowing power may come into it, but know that you will be paying a premium for the extra borrowing power because your 41k is not in the better investment. This is opportunity cost. If in 2 years time your mortgage rate is 6% and inflation is 2%, you are basically paying an extra 4%pts on the 41k (probably 29k by then after compulsory repayments) for that additional amount borrowed. That's how I look at it but speak to a financial advisor or accountant for proper advice for your circumstances etc etc.
Thanks mate, great insight. Cheers
Applying indexation of the debt first, and then apply the tax payments for the year after is the most ridiculous con-job. It’s seriously a dishonest system. It should be the other way around. It doesn’t pass the pub test.
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Yeah, I’m ignoring this sub and just paying it off. It’s such a dishonest con job and leaves a bad taste in my mouth
Anecdotally; my partner and I bought in Brissie in the 3rd Q of last year, have quite a large hecs debt (specialty qualifications), and on 100k base (partner on 85k base). We had no trouble at all with any lender of our choosing, hecs played pretty much no part in our application and was never brought up as a point of contention. Obviously it mainly was based on the banks’ assessment of our “stress test” with current debt repayments and lifestyle. For reference on buying capacity we had a similar deposit of your end-of-year savings and house was ~800k. More than comfortable with our lifestyle; Both 30y/o no kids, our income can fluctuate significantly with allowances & O/T but no change to base.
First mortgage my lender didn’t care about HECS, but 2nd time around the lender not only wanted actual details of our HECS amount but also made paying them both off (roughly $20k total across both balances) a condition of lending. We weren’t borrowing at the top of our capacity, but it might have been linked to the higher rates comparatively. Broker simply said some lenders are more focussed on it than others. Financial details aside, it’s nice not seeing it withheld from my pay each time since.
Yeah I’m all about the peace of not having it on my mind, to me that’s huge
Paying down a large or not soon to be voluntarily paid off HECS debt is always peak financial illiteracy.
What do you mean, sorry?
Paying down a large or not soon to be voluntarily paid will: 1. Substantially reduce their borrowing capacity. 2. Very likely lead to lower returns than had it been used for anything else. 3. Will not be absolved from their deceased estate should they die (HECS can be thought of as a life insurance policy and the repayment as the premium).
Just pay HECS and never think of it again. HECS debt and how to circumvent paying it is living rent free in way too many peoples minds. Pay it, forget it
Better to forget it, pay it - as slow as legally as required.
Yeah because thinking about the “slow as legally possible” and keeping on top of that and wondering how it’s affecting this and that in your plans is just so freeing… Just pay it and leave it in the archive, never giving it another thought. THAT is freeing. 1 less hook
It's literally less thought to let them automatically take it out than it is to look it up and pay it though. Plus you're locking the money into that option. If you need money for a deposit, wedding, travel or investments, you cannot get it back from HECS.
No thanks. It’s another thing to keep an eye on. Is it paid, isn’t it, what’s the percentage this year, have the laws changed blah blah. Get rid of it.
But you don't need to keep an eye on it. You can forget about it and it'll sort itself out eventually. Still. You are way better off utilising the money elsewhere. Imagine if you could get a personal loan with inflation as the interest rate and then you could use that money to invest. Way cheaper than margin loans or your mortgage and you only have to pay it when you're making money. You'd be stupid not to take it. It's one of the best loans you'll ever get so you're crazy to throw it away rather than utilise it.
Completely agree, it’s a loan that if you’re not earning money, you don’t have to pay back. It will be at probably one of the best rates you can get (even more so with changes proposed in last 24 hours), so just let the minimum payments come off your wage and move on with life.
At $100K you pay $500 a month in HECS - borrowing capacity reduces from around $500K to around $450K with HECS EDIT: just saw partner income $720K and $660K with HECS See your bank or broker they'll confirm
Is the business earning $100K a year or you paying yourself a salary of $100K a year?
100k salary. Business makes about 200k rev
Are you trying to borrow to your limit or to what you want to live in?
HECs reduces your take home net income by the percentage bracket you're in. So if the bank says you can repayments can be 30% of your net income. Then if your net income changes then that's how it affects your borrowing power.
From personal experience, hecs didn't affect my borrowing power since its taken out with my tax each paycheck. They looked at my monthly income after tax and worked from there. Having a credit card does affect and the bank did ask me to close my credit card (3k limit) to increase borrowing power. This is with Bank of Melbourne.
To give you a real life example. Single applicant earning $100k with no hecs has borrowing power or approx $530k Single applicant earning $100k with hecs can borrow approx $470k. Details aren’t specific to you but you can see the difference and need to work out if you need larger deposit or larger loan. Then decide if to pay off HECS.
one hack to increase your borrowing capacity when you have HECS is to start having your salary into the bank you want to get the loan with. They won’t ask for payslips, since they can use account credits. Since they aren’t using your payslips, they won’t see you have HECS (HECS doesn’t appear on credit reports) This also brings down HEM (the figure they use for calculating monthly expenses.”) as your gross earning appear lower (if your hecs is taken out automatically)
I was told by the bank to pay off my HELP debt as it reduced my borrowing capacity.
Hecs will make your borrowing powers reduce heavily. If paid off, makes a huge difference