Increased HECS debts to impact home loan borrowing power

New analysis has revealed it has just become even harder for a cohort of Aussies to apply for a home loan.

Thursday’s accouncement that HECS-HELP debts will increase by 7.1 per cent has pushed home ownership even further out of reach for Australian graduates.

Recent university graduate James Milburn has been more careful in managing his finances than your average 25-year-old but says he has still had his home ownership dreams dashed.

Self-described as “very very frugal”, the health insurance broker has worked diligently to save enough money for a deposit on a modest studio apartment in Melbourne’s south.

The one-bedroom South Yarra abode, listed for $180,000, was set to be Mr Milburn’s “foot in the door property”.

“I wasn’t looking for anything extravagant,” he said.

“I thought it would surely be in my price range. I had $20,000 in savings, which is more than enough for a 10 per cent deposit.”

Recent university graduate James Milburn still has around $15,000 of debt to pay off. Picture: Supplied

The young Melburnian, who recently graduated from RMIT with a Bachelors in Communications, approached a broker to discuss his loaning options.

While earning a relatively standard graduate salary of $50,000, he had already paid off about $10,000 of his $25,000 HECS debt.

“Basically, the broker told me that because of my student debt, which is only $15,000, I could only borrow $125-130,000,” he said.

“I thought I was looking at a very cheap property … what am I supposed to do if I can’t even afford something as cheap as that?”

Analysis from personal finance marketplace company Compare Club has revealed HECS-HELP debt will, on average, cut $15,000 from a graduate’s borrowing power.

As of July 2022, declaring HECS-HELP is compulsory in home loan application assessments, which, on top of 11 interest rate hikes, has made breaking into the housing market even more difficult than ever.

HECS debt cuts on average around $15,000 from a graduate’s borrowing power. Picture: NCA NewsWire / Bianca De Marchi

Compare Club chief executive Lance Goodman said the number of lending options for the average graduate drops from 15 lenders to one once HECS debt becomes a factor.

“In this scenario, this meant our average graduate could only get a loan at 5.89 per cent but without HECS, they would have been able to shave 0.45 per cent off this rate and get a 5.44 per cent loan,” he said.

“So HECS is now not only restricting borrowing power, it restricts your options and increases your repayments.”

Mr Goodman said these combined factors resulted in a “triple whammy of restrictions” facing graduates seeking to obtain a mortgage.

Instead of saving for his first property, Mr Milburn is now putting his pennies aside to pay off his student loans, while his dreams of homeownership have been kicked down the road several years.

The average student is now $24,770 in debt. Picture: NCA NewsWire / David Crosling

“I’m lucky that I only have $15,000 in debt, but for a lot of people, especially those who studied a Masters, it’s a hell of a lot worse,” he said.

With his current HECS debt, Mr Milburn can service a $140,000 loan amount, but could have serviced a $165,000 loan without it.

According to the National Tertiary Education Union, the average student is now $24,770 in debt, up from $15,191 in 2012, taking on average nearly a decade to pay it off.

Business Management Degrees could take 44 years to repay at a cost of $119,331, while a Humanities and Social Sciences Honours degree could take 40 years at $110,353.

Like other young people, Mr Milburn said his climbing debt was pushing him further away from entering the housing market.

Mr Milburn urges prospective students to research and consider the costs associated with different degrees carefully. Picture: NCA NewsWire / Gary Ramage

“Before you even get your foot in the door you’re already behind,” he said.

“It feels like all of a sudden my life is on hold; how am I supposed to catch up even if I do get into a high-paying job?

“Everything just feels like it’s piling on.”

Mr Milburn has urged prospective tertiary students to carefully consider the debt associated with each degree, as it was something he and his peers thought little about before commencing their studies.

“I think people hear about HECS debt in high school, then they go into university and it’s so easy to let everything defer to HECS,” he said.

“You don’t really think about it when you first jump into a degree; you’re thinking about the friends you’re going to make or the career you’re going to have – not the debt you’re racking up.”