It’s easy to ignore your HECS debt knowing that the government doesn’t charge interest and repayments only start when you pass a certain income threshold.
However, many young Aussies are unaware that their HECS debt is still indexed annually in line with inflation, and this year the indexation rate increased to 7.1%. This is a significant spike, compared to previous years, with the indexation rate between 2012 and 2022 averaging just 1.97%.
What does this mean?
The amount you’re required to pay each year ranges from zero for those earning less than $51,550 to 10% for those earning $151,202 or more.
Now, those earning higher incomes will be directing a higher proportion of their salary towards paying off their HECS debt each year. For example, for someone earning $120,000 (whose annual repayment rate will be 8%), this means $9,600 will be deducted from their pay. It will depend on how much is owed, however, it might hurt for a few years before the balance is fully paid off.
For a uni graduate who owes $25,000, this year’s changes would see almost $1,800 added to their account in indexation. For low-income earners, compulsory repayments will be lower, but there is the possibility that their balance will increase faster than they are able to pay it off.
Will it impact my chances of getting a home loan?
If you are planning to purchase a home, your HECS debt will be taken into consideration, alongside any other debts. The banks will review your debt-to-income (DTI) ratio. This calculation combines all your debts and divides them by your income, so someone earning $80,000 a year with liabilities totalling $400,000 would have a DTI ratio of 5.
Borrowers with a DTI ratio above 6 are generally considered higher risk, so if the amount you want to borrow already puts you close to this range, your uni debt could be what tips you over the edge. On the other hand, paying off your HECS debt now might increase your borrowing capacity but leave you with fewer funds for a deposit. If your deposit is less than 20 per cent, it might mean having to pay the Lender’s Mortgage Insurance (LMI), which is an extra cost levied against borrowers with a deposit of less than 20 per cent.
If you are unsure about how your HECS debt will impact your ability to purchase property, we recommend speaking with a Mortgage Broker who will be able to review your unique financial position.
Should you pay off your HECS debt now?
Some experts believe indexation rates will fall in the coming years as the current inflationary storm subsides. However, if you are in a fortunate financial position, it could be one of those things that are worth clearing sooner rather than later. As with most financial decisions, there are pros and cons, and at the end of the day, it will depend on your unique financial position. We always encourage speaking with a financial advisor before making any major decisions.
Speak to the APS Financial Planning team about your HECS debt.
Written by APS Senior Financial Advisor, Paul Hatzigeorgiadis.
Paul has over 25 years of experience in the financial services sector. Over Paul’s history, he has provided advice to an extensive range of clients from wealth accumulators to pre and post retirees advising them on Wealth Creation, Cash Flow Management, maximising Centrelink benefits in Retirement, Personal Insurances, Debt minimisation strategies and Superannuation. Paul is married with an 11-year-old daughter and enjoys spending time with family and friends. Whether it’s assisting clients to meet their short-term goals or working with them over a longer term, Paul enjoys helping guide his clients with their financial future.