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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Learn more about home loans

Do mortgage brokers need a consumer credit license?

In Australia, mortgage brokers are defined by law as being credit service or assistance providers, meaning that they help borrowers connect with lenders. Mortgage brokers may not always need a consumer credit license however if they’re operating solo they will need an Australian Credit License (ACL). Further, they may also need to comply with requirements asking them to mention their license number in full.

Some mortgage brokers can be “credit representatives”, or franchisees of a mortgage aggregator. In this case, if the aggregator has a license, the mortgage broker need not have one. The reasoning for this is that the franchise agreement usually requires mortgage brokers to comply with the laws applicable to the aggregator. If you’re speaking to a mortgage broker, you can ask them if they receive commissions from lenders, which is a good indicator that they need to be licensed. Consider requesting their license details if they don’t give you the details beforehand. 

You should remember that such a license protects you if you’re given incorrect or misleading advice that results in a home loan application rejection or any financial loss. Brokers are regulated by the Australian Securities & Investment Commission (ASIC), as per the National Consumer Credit Protection (NCCP) Act. 

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.

How does Real Time Ratings work?

Real Time RatingsTM looks at your individual home loan requirements and uses this information to rank every applicable home loan in our database out of five.

This score is based on two main factors – cost and flexibility.

Cost is calculated by looking at the interest rates and fees over the first five years of the loan.

Flexibility is based on whether a loan offers features such as an offset account, redraw facility and extra repayments.

Real Time RatingsTM also includes the following assumptions:

  • Costs are calculated on the current variable rate however they could change in the future.
  • Loans are assumed to be principal and interest
  • Fixed-rate loans with terms greater than five years are still assessed on a five-year basis, so 10-year fixed loans are assessed as being only five years’ long.
  • Break costs are not included.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

What fees are there when buying a house?

Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.

Tip: you can calculate your stamp duty costs as well as LMI in Rate City mortgage repayments calculator

Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.

Keep this in mind when deciding if you are ready to make the move in to the property market.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

How can I negotiate a better home loan rate?

Negotiating with your bank can seem like a daunting task but if you have been a loyal customer with plenty of equity built up then you hold more power than you think. It’s highly likely your current lender won’t want to let your business go without a fight so if you do your research and find out what other banks are offering new customers you might be able to negotiate a reduction in interest rate, or a reduction in fees with your existing lender.