HECS warning as $85,000 mistake stops Aussie from buying a home: ‘Don’t spend’
Aussies have been warned their HECS debt will have an impact on how much they can borrow from the bank for a home loan. The Barefoot Investor Scott Pape said HECS was still a “good debt” to have but warned there were risks to be aware of.
Aussie mum, Megs, wrote to Pape telling him her son had racked up $85,000 of HECS debt and was now “convinced” he would never own a home because of his student loans. She shared he studied two degrees but was unable to find work in his field.
Despite being employed full-time, she said her 33-year-old son didn’t earn enough to pay off his HECS debt and now wished he did a trade like his brothers instead. With his self-esteem “plummeting”, the mum said she had decided to help him pay off his debt.
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Pape congratulated the mum on being able to afford to repay her son’s debt. He said the reality was buying a home as a young person now relied on help from the “Bank of Mum and Dad”.
He said HECS debt was “another piece of lead in the saddlebags of young people trying to buy their first home”, especially since the debts are taken into account by the banks when deciding whether they will lend you money and how much.
“Someone earning $80,000 a year, making HECS repayments of $3,200 a year, will have their borrowing capacity reduced by $32,000, according to Flint Mortgage Group,” Pape wrote in his weekly column.
“In other words, your annual HECS repayment reduces the amount a bank will lend you by a factor of ten.”
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Because of this, Pape said it may be worth paying down HECS debt depending on how much you need to borrow.
However, if you eat into their deposit to do this, you may need to factor in Lenders Mortgage Insurance (LMI) which insures the bank, not you, and typically applies to deposits under 20 per cent. This can cost thousands of dollars over the life of your loan, Pape said.
He said HECS was still a “good debt” since most people went to university to eventually land a well-paying job. But he said there was a “simpler” lesson in all of this for the woman’s son.
“Don’t spend $85,000 studying two degrees that you can’t find employment for. I mean, what the hell did he study … Middle Eastern pottery?” he said.
It comes as major changes to HECS are announced ahead of the federal election next year.
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