- Student loans to be indexed at 7.1% this coming June
- Loan hike expected to make financing homes harder for some Australians
- Older mortgage-holding Australians to face more challenges when refinancing
Millions of Australians are bracing for the impending Higher Education Contribution Scheme-Higher Education Loan Program (HECS-HELP) debt hike, with the loans set to be indexed at a sky-high 7.1% from 1 June, doubling from 3.9% last year. In Australia, student loans are indexed to inflation, which means that the value of debt is adjusted to account for inflation. In short, student loan debts will increase if inflation rises.
Mounting HECS-HELP loans can lead to an excess of repayments, which happens when the inflation rate exceeds the income growth rate. In other words, it occurs when a borrower’s debt rises more quickly than their ability to pay off their debt.
While this will be disheartening news to the many Australians struggling to keep up with rents, electricity bills, and housing prices increasing at record rates, a Compare Club analysis has unveiled that the student debt increase holds additional adverse implications for prospective homeowners.
Homeownership hang-ups
As HECS-HELP was made compulsory in home loan assessments last year, the increased debt will introduce another hurdle for Australians seeking to enter an already overheated market.
HECS-HELP debt impact in borrowing capacity
| Profile | Salary | HECS-HELP debt | Borrowing capacity (with HECS) | Borrowing capacity (without HECS) | Difference |
|---|---|---|---|---|---|
| Average Graduate | $69,000 | $22,000 | $394,558 | $409,558 | $15,000 |
| Average Couple | $136,000 | $44,000 | $830,767 | $852,286 | $21,501 |
| Couple with 1 postgraduate degree | $160,000 | $88,000 | $958,922 | $1,081,271 | $59,349 |
| Single with 7 years of extended studies | $120,000 | $100,000 | $621,436 | $725,468 | $104,032 |
Source: Compare Club.
“In addition to more debt and lower borrowing power, having a HECS-HELP debt severely limits a borrower’s lending options. When our brokers looked at our average graduate, the number of options dropped from 15 lenders to 1 lender once HECS debt was added into the equation,” says Compare Club CEO Lance Goodman.
“In this scenario, this meant our average graduate could only get a loan at 5.89% but without HECS, they would have been able to shave 0.45% off this rate and get a 5.44% loan. So HECS is now not only restricting borrowing power, it restricts your options and increases your repayments. This means graduates face a triple whammy of restrictions when they look to get a mortgage.”
Australians who hit the $48,361 compulsory repayment threshold will pay off their debt automatically through gross income payments. However, the debt repayments are subtracted from one’s total debt immediately.
Instead, the repayments will be consolidated at the End of the Financial Year when filing one’s taxes. This means the indexation rate increase will apply to the total amount owing, ignoring any repayments already deducted from one’s income.
The student loan hike will also affect older mortgage-holding Australians. Around 12.5% of Australians in their 40s owe HECS-HELP debt, which will be considered should they refinance their home loan.
Homeowners holding student debt while facing a looming fixed rate expiry cliff may face the risk of being trapped in mortgage prison— unable to refinance, they are forced to pay higher interest rates on their home loan.
~~
Disclaimer: This article contains general information and should at no time be considered advice to the reader. The reader should always verify their situation with the relevant certified professionals before taking any further steps. See our Terms of Use.
