How much less home buyers can borrow after the 7.1% HECS increase

Three million Australians who were hit with a 7.1 per cent increase in their HECS debt last week will now also find it more difficult to secure a home loan.

As of September, banks were made to include the HECS or HELP debt in debt-to-income ratios, meaning the amount still owed affected how much could be borrowed.

Harrison Astbury paid off his $16,000 HECS debt to avoid indexation rises. Credit: Paul Harris

Millions of graduates have made voluntary HECS debt repayments to avoid the indexation rise, but financial experts have urged graduates not to panic and should instead focus on any other forms of debt.

HECS debts increased on June 1 in line with inflation, reaching the highest level in more than three decades.

To avoid the indexation rise, Harrison Astbury decided to use some of the money he had saved for a home deposit to pay the rest of his $16,000 HECS debt in one lump sum.

“To see HECS indexation go up by 7.1 per cent, that’s a huge whack,” he said. “It would have been a slap in the face to see my debt increase by more than $1400 and spend more time [over] the next financial year chipping away at that.”

The 29-year-old accrued about $30,000 of debt after completing a bachelor of journalism from Griffith University in Queensland and has been in the workforce for eight years.

He’s now an editor and research analyst at financial comparison and analysis site InfoChoice and is looking to buy a townhouse in Brisbane North.

“Since I have had a few years in the game now [with] a salary, I had savings where I could pay it off and not totally ruin my first-time buyer goals,” he said.

The average graduate with a $22,000 HECS debt earning $69,000 would have lost $15,000 in borrowing capacity, according to modelling from CompareClub.

But a single person with seven years of extended studies would see a drop in borrowing power of more than $104,000.

The Australian Taxation Office said voluntary HECS repayments were almost 60 per cent higher this financial year to March than they were in the previous year.

The number of voluntary repayments has been steadily increasing, with 5.2 million made in the 2021-22 financial year worth $5.9 billion, compared with 4.4 million repayments the year prior.

It takes an average of 9.5 years to repay the debt in full, compared with 7.3 years in 2005 - 2006, though modelling by the National Tertiary Education Union has found some degrees may take up to 44 years to pay off under current policy settings.

Australia has $74.3 billion in HECS-HELP debt, four times as much as in 2009, with students shouldering an average debt of $24,770.

Economist Bruce Chapman said graduates should not stress too much about increases to their HECS payments.

“Generally speaking, paying off a HECS debt early is financially not a very good idea,” he said.

“While the level of the debt is indexed to prices, wages generally go up faster than prices ... It’s just the way the government can make sure that it gets back from the student, the real value of the debt.”

He said the sharp indexation increase showed a distorted view of how bad repayments were compared to wages, adding banks considered the fact HECS debts are generally small compared to mortgages and paid off within 10 years.

“The amount [a person] can borrow is going to have an interest rate on it, which is going to be far higher in the interest rate on the HECS debt,” he said.

Head of Lending at digital lender WLTH Cat Mapusua agreed, saying while the decision to pay off HECS or secure a mortgage depended on overall savings, loan metrics and individual factors, she would not encourage clients to focus on HECS.

“It’s not considered a ‘real debt’ as there’s no term, there’s no interest, and it’s based on index from inflation [which varies],” she said.

“It can sit in the shadows while you’re focusing on true debts, where there’s interest that’s constantly accruing with a term, so they have a deadline toward that debt.”

As of February, the average time it took for a couple aged 25 to 34 to save for a 20 per cent deposit on an entry-priced house was four years and 11 months nationally, or six years and eight months in Sydney, according to the 2023 Domain First-Home Buyer Report.

There were just 8128 new loans granted to first-home buyers who planned to live in their homes in March this year, 21.8 per cent fewer than in March 2022. The total value of these loans was $5.2 billion, $1.1 billion less than the previous year.

Housing Industry Association chief economist Tim Reardon said it was “extremely difficult” for first-home buyers to secure a mortgage.

“It’s harder to get a loan today than it was in the 80s. But because of the lower cash rate, it is easier to service it,” he said.

“The deposit that first-time buyers need to have to buy is higher than what it was as a share of the home than what it was in the 1980s.”

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