When you apply for a home loan, lenders are primarily concerned with your ability to repay it. While they do consider HECS debt, it’s not the most critical factor. Many Australians have HECS debt, and repayments are automatically deducted, making it less of an issue. Lenders focus more on other debts like credit cards, car loans, and personal loans, as these impact your debt-to-income ratio and repayment history.
As inflation and interest rates rise, many Australians are questioning whether they should pay off their HECS debt before buying a home. According to a recent article by The Guardian, the indexation rate for HECS loans will be 4.7% in 2024, a decrease from the previous year’s 7.1%.
Key Considerations
Impact on Borrowing Capacity: HECS debt can affect your borrowing capacity since lenders consider your overall debt and repayment obligations when assessing your loan application. Paying off this debt might improve your loan eligibility, but it’s essential to weigh this against other financial priorities.
Cost Comparison: HECS loans are relatively low-cost compared to other debts like credit cards or personal loans. It might be more beneficial to pay off higher-interest debts first or save for a home deposit.
Opportunity Cost: Delaying a home purchase to pay off HECS debt could result in higher property prices later. Entering the property market sooner may offer better long-term financial returns.
Strategic Financial Planning: Your decision should be based on your financial health, market conditions, and personal goals. For many, focusing on saving for a home deposit in a rising property market might be more advantageous than paying off low-interest debt.
It’s important to note that paying down your HECS debt won’t increase your borrowing capacity, as lenders will consider the repayment regardless of the loan balance. Therefore, reducing your HECS to a small balance won’t improve your borrowing potential.
To increase your borrowing capacity, you should consider closing the HECS debt entirely. However, it’s advisable to engage an experienced broker to run the numbers and consider the differences based on your financial goals. MV Finance offers personalised financial advice and services to ensure you make the best choice for your circumstances.
Contact MV Finance today to start your journey towards home ownership with confidence.
