Banks told to ignore student debt when weighing up home loans

Australians with student HELP debts will be able to borrow more for a home or get easier access to a mortgage under changes to lending rules imposed on the nation’s banks as the federal government broadens its efforts to woo young voters.

In a range of changes that include helping builders get started faster on the construction of apartment blocks, Treasurer Jim Chalmers on Wednesday will unveil an overhaul of banking regulations that critics complain disproportionately hit university and TAFE graduates as they seek to enter the property market.

People with HELP debts may be able to borrow more or find it easier to get a mortgage under new government plans.Credit: Steven Siewert

Home ownership rates among young people have fallen to their lowest levels since World War II on the back of high interest rates, an explosion in house prices and growing HELP debts.

About 3 million Australians have outstanding HELP loans, collectively worth more than $43 billion. The government has promised to slice HELP debts by 20 per cent from June this year, after the federal election.

Chalmers, who met with the CEOs of the nation’s biggest banks on Tuesday, has written to both the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission to vary lending standards and how they affect people with HELP debts.

“We’re tackling this housing challenge from every possible angle. These are commonsense clarifications that will help more Australians into a home,” he said.

Under current APRA serviceability regulations, when a bank vets a potential first-time borrower for a loan, they take into account their ability to absorb a three percentage point increase to their mortgage interest rate.

Under the changes, banks will be able to exclude HELP repayments from the serviceability assessment for a loan where the borrower is expected to pay off their debt in the near term.

The definition of “near term” will be the focus of consultation between the banks and APRA, but it is expected lenders will make their own judgments based on the individual circumstances of customers.

In another move aimed at increasing credit to younger home buyers, APRA will drop the requirement that HELP debts are included in the debt-to-income ratio for a potential mortgage.

Debt-to-income ratios of above six – where a person is borrowing more than six times their annual income – are considered risky and generally restricted. By excluding HELP debt from overall debt, home buyers will be able to borrow more.

A graduate earning $100,000 with a $60,000 HELP debt could borrow up to $540,000 under a debt-to-income ratio of six. With the HELP debt excluded, they could borrow up to $600,000.

Separately, APRA will overhaul advice to banks on how they loan cash to the developers of apartment blocks.

Since 2017, some banks have interpreted the APRA advice to provide loans to developers only where they have sold all units before a project starts construction. This has prompted complaints, particularly from smaller builders, that they have been unable to begin work even where they have a high percentage of pre-sales.

APRA will tell lenders that while banks will have to consider levels of pre-sales when considering a loan to a builder, all units will not need to have been sold.

Chalmers said the changes together would help borrowers and builders.

Treasurer Jim Chalmers spoke to CEOs of the nation’s big banks on Tuesday about improving access for young people to mortgages.Credit: Alex Ellinghausen

“People with a HELP debt should be treated fairly when they want to buy a house and we’re working with the regulators to make sure they are. By unlocking more finance from the banks, we’ll see more housing projects get off the ground more quickly,” he said.

A Senate inquiry into housing affordability last year heard evidence that the current treatment of HELP loans by banks as well as the sharp increase in student debts was restricting credit to potential first-time buyers.

Investment bank Barrenjoey told the inquiry it was “counterintuitive” that someone with a tertiary education with high future earnings potential had their borrowing capacity curtailed because of their student debt.

The Mortgage and Finance Association of Australia, which advocated for adjusting or waiving HELP debt for first-time buyers, said student debt had become “a significant barrier for many aspiring home owners”.

Large student debts have soared over recent years, with Tax Office data revealing the number of people with a HELP debt of more than $100,000 climbed to 56,700 last financial year, compared with 47,847 in 2022-23.

The Australian Banking Association, which expressed scepticism at last year’s Senate inquiry that any change to HELP debts would have a significant impact on customers’ ability to get a loan, backed the move.

Association chief executive officer Anna Bligh said it was a constructive step that would unlock more credit for potential home buyers.

“Banks support responsible lending rules to protect borrowers and ensure they can repay their loans. However, there is always merit in carefully considered updates to regulatory guidance that may help some Australians safely access more credit,” she said.

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