Will a HECS or HELP debt affect your credit score?

Will a HECS or HELP debt affect your credit score?

If you sailed through your university degree without giving a second thought to the HECS-HELP debt you were racking up in the process, it’s safe to say you’re not alone.

But while your uni days might now be a thing of the past and your focus is on making plans for the future, you may be left with growing concern that your student debt will rear its ugly head.

HECS-HELP loans assist eligible Commonwealth-supported higher education students to pay for their studies. And while this is a helpful and often necessary program for many tertiary students in Australia, it’s oftentimes overlooked as a genuine debt.

The reason for this likely comes down to the ways in which a HECS-HELP loan differs from loans provided by commercial lenders, including the following: 

  • Interest isn’t charged on the loan amount (though indexation is added each year)
  • It’s often viewed as an investment
  • Repayment amounts are dependent on your salary
  • There’s no time limit for paying it off

For the most part, it can be easy to disregard your HECS-HELP debt as it’s generally deducted from your salary before your take home pay reaches your bank account.

But if you find yourself in the market for a finance product, such as a personal loan, car loan or a home loan, you may wonder if your student debt could impact your credit score and borrowing potential.

While your HECS-HELP debt might not technically affect your credit score, it can affect your borrowing power.

Generally speaking, Australian university graduates with a HECS-HELP debt won’t find themselves at risk of defaulting because repayments are directly deducted from their salary. Plus, if they lose their job, their repayments are put on hold. As a result, the debt won’t impact their credit score like a commercial loan could.

How your HECS-HELP debt can affect your borrowing power

When you apply for a loan, the bank or lender will likely assess your gross income, deduct expenses and liabilities, and calculate how much you can afford to borrow off your net income.

Even if your HECS-HELP loan is the only debt you have, it is still considered a liability. It reduces your net income by between 1 per cent for those earning $46,620, and 10 per cent for those earning upwards of $136,740.

This means that you are likely to have greater borrowing power, or be able to borrow more money, once your HECS-HELP debt has been paid off.

Ways to improve your borrowing power

If you do still have a HECS-HELP debt, there are actions you can take to potentially improve your borrowing power and help boost your chances of getting approved for the loan you want.

Check how much is still owing

If you earn a salary of $100,000, for example, and you’ve only got $2,000 owing on your HECS-HELP loan, it might be worth paying off the remaining amount in full, and then issuing proof to your lender. The reason being is that the lender will still see your debt as 7 per cent (the repayment rate) of $100,000 (the repayment income), which is $7,000. Eliminating this liability, if your finances allow, will likely improve your borrowing power, which may be particularly important for higher value loans such as a home loan.

Live within your means

This may seem like an obvious one, but it’s important to be aware that banks will often go through your statements very thoroughly, and frivolous spending generally won’t make you seem very responsible or disciplined as a saver. On top of this, it may add to your expenses and bring down your net income, affecting your borrowing power along the way.

Reduce your credit limits

If you have a credit card with a considerable amount of available credit, it might be an idea to reduce the limit. For example, you may have a credit card with a $10,000 limit, but only $1,500 worth of debt on it. Even though your debt is technically only $1,500, your lender will actually consider this a $10,000 debt since you could essentially use the remaining $8,500 credit at any given moment. 

Why it’s still important to think about your credit score

Having an excellent credit history is an important part of your financial health. Borrowers with good credit scores typically have more finance options and more competitive rates available to them. So, it goes without saying that it’s always a good idea to consider your credit score.

Even though having a HECS-HELP debt doesn’t directly affect your credit score, the fact that it can limit your borrowing power means that a strong credit score can really assist with securing your preferred loan.

Here are some ideas of steps you could take to work on improving your credit score:

  • Lower your credit limits: This may help you avoid overspending, make your payments more manageable, and will also be recorded as positive credit behaviour.
  • Pay your credit card bills on time: Consider paying more than the minimum amount, and pay them off in full wherever possible.
  • Pay your utility bills on time: It might be a good idea to set a reminder for when your bills are due each month.
  • Limit the amount of applications you submit for loans or credit cards: Be sure to do your due diligence before applying, and only submit one application at a time.
  • Focus on paying down existing debts: If you have multiple debts, you may like to consider a debt consolidation personal loan to help make payments more manageable, and potentially access a more competitive interest rate.
  • Consider reaching out to a financial advisor: A financial advisor can assist by providing you with personalised information unique to your financial circumstances.

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Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

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The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

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How can I qualify for a joint home loan if my partner has bad credit?

As a couple, it's entirely possible that the credit scores of you and your partner could affect your financial future, especially if you apply for a joint home loan. When applying for a joint home loan, if one has bad credit, there may be steps that can help you to qualify even with bad credit, including:

  • Saving for a higher deposit, ideally 20 per cent or more. Keep in mind:  a borrowed amount of less than 80 per cent of the property value also saves the cost of Lender's Mortgage Insurance (LMI).
  • Consistent employment records, regular savings habits, and an economical lifestyle can help prove financial stability and responsibility. These can improve your chances of approval even if there are some negative marks on a credit report.
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While these tips may assist, if you find this overwhelming, consider consulting an expert advisor who can offer personal guidance based on your financial situation.

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You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

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Can I get a home loan if I owe taxes?

Owing money to the Australian Tax Office is not an ideal situation, but it doesn’t mean you cannot qualify for a home loan. Lenders will take into account your tax debt, your history of repaying the debt and your other financial circumstances, while reviewing your home loan application. 

While some banks may not look favourably upon your debt to the ATO, some non-bank lenders may be willing to help. They will look into the reasons for your tax debt and also take into account the steps you have taken to repay it before deciding whether to offer you the loan or not. Having said that, there are no guarantees - it depends on your whole financial picture.

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The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Can I take a personal loan after a home loan?

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  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
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Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

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Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

What is a bad credit home loan?

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If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

What is a credit file?

A comprehensive summary of your credit history from an authorised credit reporting agency.

It includes your credit details, credit taken in the last five years, any default payments or credit infringements, arrears, repayment history, bankruptcy filings and a list of credit applications (including unapproved credit applications) in addition to your personal details.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

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If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

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How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

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If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.