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Lingering university debt will put home ownership further out of reach for many Australians, as home loan serviceability is lowered.
Millions of Australians are expected to experience a drop in borrowing power as the Higher Education Loan Program (HELP), formerly known as the Higher Education Contribution Scheme (HECS), undergoes high indexation starting from today (1 June).
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While loans from HELP are interest-free, they are subject to annual indexation, which adjusts debts in line with inflation.
With inflation currently at record highs of around 7.1 per cent, Australians with a $50,000 student loan will face an additional $3,500 of government debt as indexation on HECS-HELP debt takes effect.
This increase in debt has significant implications for individuals’ borrowing power.
Given the ballooning student debt, Compare Club revealed that for someone on an average wage (around $69,000) holding an average student debt, their borrowing power could be cut by $15,000.
According to Compare Club, an average wage earner with an average student debt could see their borrowing power reduced by $15,000. For those in higher income brackets with higher levels of debt, their potential loan amount could be reduced by up to $100,000.
Recent data disclosed by the Australian Taxation Office (ATO) revealed that the total student debt shared by over 3 million Australians had reached $74.3 billion as of June 2022. Notably, some individuals have accumulated substantial debts, with one student accruing a debt of $737,070, the highest recorded, followed by another with a debt of $495,990.
Comparing the current situation to a decade earlier, in June 2012, around 1.68 million Australians had student debt totalling $25.5 billion, resulting in an average debt per person of approximately $15,000. Today, the average debt per person stands at $24,000.
On top of 11 interest rate hikes, it’s an additional blow to prospective home buyers, as anyone looking to get onto the property ladder may not be able to afford the home they have their heart set on.
The once-considered ‘good debt’ was only made compulsory in home loan application assessments last July, severely limiting a borrower’s lending options, Compare Club co-chief executive Lance Goodman said.
With HECS debt now factored into the loan application, the number of lending options for the average graduate dropped from 15 lenders to just one, he said.
“In this scenario, this meant our average graduate could only get a loan at 5.89 per cent but without HECS, they would have been able to shave 0.45 per cent off this rate and get a 5.44 per cent loan,” Mr Goodman said.
“So HECS is now not only restricting borrowing power, it restricts your options and increases your repayments. This means graduates face a triple whammy of restrictions when they look to get a mortgage.”
Anyone who earns more than the $48,361 threshold automatically pays off their student debt through compulsory gross income payments, however, those repayments are not deducted from the total debt in real time, he added.
“It’s instead consolidated at tax time, meaning that the indexation rate is applied to the full debt owing, not taking into account any repayments deducted from incomes,” Mr Goodman said.
While some Australians may have raced to draw down their debt, many will be hit with more debt.
Mr Goodman said the impact of HECS debt extends to older Australians holding mortgages, as approximately 12.5 per cent of individuals with HECS-HELP debt are in their 40s.
This debt will now be taken into account if they attempt to refinance their mortgages.
In addition, the increase in HECS repayments in June could also negatively impact home owners nearing the end of their fixed-rate periods.
These individuals may find themselves facing additional challenges in securing favourable mortgage terms due to the increased student debt repayment obligations, pushing them into ‘mortgage prison’.
[Related: Is HECS debts still 'good debt'?]
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