As banks become stricter with lending, could your HELP debt get in the way of getting a home loan?
With banks taking a stricter approach to lending, it might be time to start paying off HELP debt. (ABC News: Tim Madden)
As banks rein in lending in the wake of the banking royal commission which revealed “irresponsible lending is endemic in Australia”, those who might have easily secured a home loan a few years ago now face much more stringent criteria.
Banks are looking more carefully at expenses and debts which, for 2.7 million Australians, will include a HELP (formerly HECS) debt.
In years gone by, financial advice about how to deal with HELP debt was typically not to worry about it because it doesn’t accrue interest and it’s “the best loan you’ll ever get”.
The total number of people with outstanding HELP debt from 2005-2006 to 2016-2017.
The advice has generally been if you have other debts, like a car loan or credit card debt, to pay those off first.
And while advice of paying off your bigger, more interest-accruing debts first still stands, the part about not worrying about paying off your HELP debt might not.
Your HELP debt affects how much you can loan
It always has. You just might not have ever noticed.
Ask anyone in the financial services industry and they will tell you, even though it doesn’t attract interest, a HELP debt is still a debt.
When you apply for a home loan, your bank or mortgage broker will look at your gross income, deduct expenses and liabilities, and make a calculation about how much you can afford to loan off your net income.
When you consider a HELP debt as a liability, that’s deducting anywhere from 2 per cent for those earning $51,957 a year, all the way to 8 per cent for those earning $107,214 and above.
How the repayment rate currently stands
|2018-2019 Repayment threshold||Repayment % rate|
|$51,957 – $57,729||2.0%|
|$57,730 – $64,306||4.0%|
|$64,307 – $70,881||4.5%|
|$70,882 – $74,607||5.0%|
|$74,608 – $80,197||5.5%|
|$80,198 – $86,855||6.0%|
|$86,856 – $91,425||6.5%|
|$91,426 – $100,613||7.0%|
|$100,614 – $107,213||7.5%|
|$107,214 and above||8.0%|
Of course, that’s all going to change from July 1 next year when you’ll have to start paying back your HELP loan when you start earning $45,800 a year.
In recent years we’ve seen lenders exercise lenient lending standards, which is probably why HELP debt hasn’t been payed much of a thought in securing a home loan.
But as paperwork checks for borrowers increases, some experts suspect HELP debts could become a barrier in being approved for a home loan in the future.
Patrick Canion, a financial planner and CEO of IPAC Western Australia, said what we’re seeing as a result of the banking royal commission is that banks are exercising more scrutiny towards people’s expenses.
“It used to be that the banks would just use an average benchmark or make a lot of assumptions about what your personal expenses are to see whether you can afford the loan or not.
“Now, because they’ve been criticised for having some lax loan-assessment standards, we’re just starting to see that they’re getting very careful about that.
“So, they look at your gross income and work out your gross-income tax, but then they’ll say ‘wait a minute’, if there’s a HELP loan, let’s see how that affects your ability to afford to borrow money, and so from that aspect I can see how that has the potential to be a problem for the future.”
Could it prevent you from getting a home loan?
Short answer: It *could*, but there’s more to it.
Currently, a HELP debt is something lenders will consider in working out how much money you can afford to loan.
But as Patrick Canion said, “you have to be on a knife edge for a HELP loan to be the deciding factor”.
Because the percentage of your income that you pay towards HELP is relatively small, Mr Canion said where it could become a deciding factor for a lender is in a case of trying to refinance a home when the property isn’t worth what it was when it was purchased.
So what can you do?
Brisbane-based mortgage broker Jeff Falconer from Park First Home Loan suggests that if the amount of your HELP repayments drops your net income to an amount which makes you ineligible from borrowing what you need to buy a property, it might be worth paying off the remaining HELP debt before applying for the loan.
“A good customer will always still get a loan. If you fit the criteria, there’s nothing that would stop them getting a loan,” Mr Falconer said.
“But if something is close to the criteria or is tight for servicing … that’s more now where [a loan application] might be declined, or at least be made harder.”
This would only be a sensible plan if you only had, say, $10,000 left to pay on the HELP loan which you could knock over and then turn your attentions to saving for a home-loan deposit.
What if you still have a hefty HELP debt?
TL;DR: Ignore it, save for a deposit and apply for a loan.
Mr Canion says things could be a bit more complicated if you have a slightly larger HELP debt.
That’s beacuse if you use what you would have spent on a deposit paying down your remaining HELP debt, you either have to borrow more to make up for the deposit, or wait longer to borrow because you need to save up for your deposit again.
“The bank will take into account your HELP loan and the cost of that will reduce the amount that you can take out tomorrow. But, on the other hand, if you don’t have a deposit, you might not be able to borrow in the first place,” Mr Canion said.
“So I think the risk is that borrowers could be between a rock and a hard place if they have a significant HELP loan and banks make their criteria more difficult.”
And what does the bank say?
The Commonwealth Bank said it considers “a number of factors when assessing a home loan application, including a customer’s income, living expenses and liabilities”.
“Where HELP debt forms part of a borrower’s liabilities, it is taken into consideration during the assessment process.”