Should I save for a house deposit or pay off my HECS debt?

There has been much commentary in the media recently about growing HECS debts that many young (and not so young) Australians are now facing. For many, a debt carried over from studying for a university degree for their chosen career path has typically been one of those “hidden” debts – one that they worry about “later on”.   

However, with consecutive years of CPI indexing adding thousands of dollars and more years to that debt, and a growing realisation it can have major impacts on other life plans, many are finding themselves at a crossroads – in particular deciding whether to save for a house deposit or pay off a HECS-HELP debt.  

Each option has pros and cons, and understanding the key factors will help you make an informed decision that aligns with your financial goals. 

Here are the key factors to consider.  

Understanding your HECS debt 

HECS-HELP is a government loan that helps cover education costs. Unlike other forms of debt, it has unique features.  

While HECS doesn’t accrue interest, it is indexed annually in line with inflation, which means your balance increases slightly each year. Repayments are automatically deducted from your salary once your income exceeds the income threshold ($54,435) and the repayment rate increases with your earnings. 

Impact on borrowing capacity 

Your HECS debt may impact your ability to borrow. When applying for a mortgage, lenders determine how much you can borrow based on several factors such as income, expenses, and existing debt – this is known as borrowing capacity. 

While the size of your HECS debt has no direct impact on your borrowing capacity, repayments lower your take-home pay, which reduces your ability to service the loan. Having HECS debt doesn’t prevent you from obtaining a mortgage, but it may limit the amount you can borrow. 

Saving for a house deposit 

Owning a home is a significant milestone for many, and saving for a deposit often takes priority over paying off HECS debt. It requires significant time and effort, so the sooner you start, the better.  

Property prices have historically risen over time, so securing a property earlier allows you to benefit from potential capital growth. 

Additionally, saving for a larger deposit (ideally 20% of the property’s value) helps you avoid paying Lenders Mortgage Insurance (LMI), which can add thousands to the cost of your loan. 

On the other hand, saving for a deposit may delay clearing other debts like credit cards. Lenders factor in the card’s credit limit when calculating your debt obligations, which may reduce the amount you can borrow for a mortgage. 

Key considerations 

Before deciding on your approach, take a step back and evaluate the following: 

1.  Your financial goals: Is owning a home your top priority, or do you feel more comfortable clearing your HECS debt first?
2. Cash flow: How will paying off HECS or saving for a deposit affect your ability to meet your day-to-day expenses?
3. Interest rates: Unlike HECS, home loans come with significant interest costs. Once you own a property, paying down your mortgage will likely take priority over paying off your HECS debt. 

If property ownership is your immediate priority, direct your savings toward the deposit and focus on reducing your credit card limit, or paying it off then closing it, to maximise your borrowing capacity. 

If you’re several years away from buying a home, consider making voluntary HECS repayments to reduce your debt while starting to save for a deposit. 

Here are some pros and cons of each option: 

A partner in your journey 

Ultimately, the decision to pay off your HECS debt or save for a house deposit depends on your circumstances, needs, and goals. 

Partners Wealth Group are experts in mapping out your position and determining the best approach to help you achieve your financial and lifestyle goals. 

Find out how we can support you and your family as you navigate life’s financial decisions.

Click here to get in touch

 

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.