A little-known lender policy is unlocking an offsetting effect for some of the three million Australians carrying a HECS-HELP debt.
The borrowing capacity of younger investors has materially improved on the back of a little-known lender policy change, but buyers may have missed the headlines amid controversial changes to property tax which officially came into play this week, including the removal of negative gearing.
While lenders are approaching investment loans with caution as the dust settled around the policy changes, the federal government's decision to wipe 20% off all student debts last year has pushed many borrowers below lender thresholds, opening up their opportunities as property prices fall.
In fact, some banks no longer factor HECS debt into servicing assessments at all. This includes Australia's largest lender, the Commonwealth Bank, along with both National Australia Bank and Westpac.
The change in lender assessment procedures followed advice from the Australian Prudential Regulation Authority, which was exploring how to get more first home buyers into the market by changing lender criteria.
Changes to capital gains tax announced alongside the removal of negative gearing benefits have now also firmly cemented the government's push for first home buyers ahead of those already in the market.
NAB confirmed that it takes HECS debt into account as part of a borrower’s overall financial position, however that changes introduced last year means it won’t always impact how much someone can borrow.
“For example, customers with lower balances may find it no longer impacts their borrowing capacity, which can make it easier for some first home buyers to get into the market,” NAB executive home ownership Lin Lu says.
The change to lending criteria came into play after treasurer Jim Chalmers urged the banking regular to reassess how banks assess student loan repayments in a move designed to improve the chances of first home buyers finding a foothold in the property market.
This prompted APRA to reach out to banks for feedback on the removal of HECS-HELP debts from debt-to-income ratios and serviceability assessments when debts are soon to be repaid.
University students had 20% wiped off their debt last year. Picture: Getty
For someone with the average debt of $27,600, this will see $5,520 wiped from their outstanding loan. This materially improves the borrowing capacity for younger investors, who may look to rentvesting or other strategies to secure their place on the property ladder.
How it works
Assuming you are an investor earning $120,000, the negative gearing change will reduce borrowing capacity for many, but for younger borrowers carrying HELP debt, there’s also an offsetting effect developing through these relatively unknown lender policy changes.
This is lifting the burden for anyone with a student debt across all Vocational Education and Training (VET) student loans, apprenticeship loans and other student loans.
For someone earning $70,000, this will reduce the minimum repayments they have to make by $1,300 a year.
Buyers re-engage
The 20% reduction in HECS balances has had a real but targeted effect on the market since being introduced 12 months ago, according to Mortgage Choice broker Paul Williams.
“We’ve definitely seen young buyers and first-home buyers re-engage,” he says.
Banks are now viewing HECS as lower-risk debt when applying for a home loan. While you will need to disclose all of your financial details, including your student loan debt, lenders will review this information as though HECS isn’t a traditional loan with monthly bills.
“What’s mattered most isn’t the debt wipe itself, but the fact that it’s pushed many borrowers below the specific thresholds that several lenders now use to exclude HECS from loan servicing entirely," he adds.
NAB excludes HECS repayments where the balance is $20,000 or under. Picture: Lisa Maree Williams
“NAB, for instance, will exclude HECS repayments where the balance is $20,000 or under, so a client whose debt dropped from, say, $24,000 to $19,200 after the 20% cut suddenly passes servicing when they wouldn’t have before.”
The advice from Mr Williams is to get your actual HECS balance from myGov and make sure to discuss the new balance with your broker.
“Many borrowers discover they’re closer to paying it off than they thought, especially after the 20% reduction," he says. "Then get your borrowing capacity assesses early by a broker, because lender treatment varies dramatically.”
CBA can exclude the debt if repayment is under 12 months away or soften the buffer for one-to five-year repayments.
“Lenders like Westpac, ANZ, ING and ME Bank still factor the full HECS repayment into servicing – so where you apply matters enormously, hence how a broker can help younger borrowers into the market,” Mr Williams says.
According to PropTrack, demand for housing is softening while home prices have declined for the last two months in a row.
Financial markets are still also predicting further interest rate hikes this year following strong inflation from geopolitical conflicts.
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