$90,000 HECS warning after young Aussie rejected from home loan: ‘I was shocked’

A young Aussie has revealed why her HECS debt and Afterpay account nearly stopped her from buying her first home. The 22-year-old bought her first home for $500,000 this year but said she wasn’t able to get a mortgage through any of the major banks.

Sydney resident Lou has around $38,000 in HECS debt and is in her final year at Macquarie University studying commerce and IT, while also working full-time in tech. Earlier this year, she managed to save up more than $100,000 for her first home deposit.

She told Yahoo Finance she was shocked when she started applying for home loans and realised how much her HECS debt and Afterpay account impacted her ability to qualify. She said she had no other debts and thinks they were the major reason she was rejected from her first home loan application.

RELATED

• Couple's $50,000 shock after mortgage cliff plunge: 'Not made a dent'

• Insidious danger lurking behind common cashless solution: 'Avoid at all costs'

• Rare 50 cent coin worth $40: ‘Looks like a regular coin’

“When I was applying with different lenders, I went through a borrowing capacity calculator with them and saw the difference between if I had a HECS debt and if I didn’t,” Lou said.

“Because the difference was so big I couldn’t really go with that lender and wouldn’t be able to buy my property.”

Lou said she discovered her HECS debt reduced her borrowing capacity by between $50,000 to $90,000, depending on the lender.

“It was a really big difference. I was shocked. I didn’t realise how much it would affect it,” she told Yahoo Finance.

Lou said she eventually qualified for home loan pre-approval with an online lender but there was a major condition to the loan.

“With my Afterpay debt, they saw it on my statement and said I needed to close it and send them an email with my confirmation that my account had been closed,” she said.

Do you have a home-buying story to share? Contact tamika.seeto@yahooinc.com

How does HECS affect home loan applications?

Mortgage broker Marina Michael said many of her clients were “shocked” when they were told their HECS debt would impact their ability to get a home loan.

Michael said lenders would look at your income and how much your compulsory repayments would eat into your take-home pay, rather than the size of your HECS debt.

“If you're on $90,000 as an annual income, it doesn't matter if you have $100 owing on HECS or $100,000 owing on HECS,” the eLending Finance director told Yahoo Finance.

“That is where people get shocked because they might have $1,000 owing but that is reducing their borrowing capacity.”

You have to start repaying your HECS debt once you earn $54,435 or more. This starts at 1 per cent of your income and progressively increases to 10 per cent for those earning $159,664 and above.

Commonwealth Bank CEO Matt Comyn recently said the bank could be prepared to take a "more tailored approach" for first-home buyers with HECS debts.

“I do think there is a case to try to have targeted assistance to first home buyers. We are looking at a number of things and things that are within our control and settings – not things that we’re relying on the regulator for,” Comyn told a parliamentary review.

How does Afterpay affect home loan applications?

While Afterpay is not recorded on your credit report, it can still be taken into account when banks are determining your creditworthiness.

As a general rule, Michael said debts like Afterpay and credit cards reduce your borrowing capacity on a one-to-five ratio. So for every $1,000 limit, you lose about $5,000 of your borrowing capacity.

In addition to your borrowing capacity, Afterpay can reflect badly on your character as a borrower.

“If you cannot pay back or afford a small retail expense now, then how can you pay for your home loan? So it’s all about how it reflects to your character,” Michael explained.

“HECS is not considered a bad debt, it can be great to your character that you went to uni or studied at TAFE. Whereas afterpay is considered a bad debt because they're saying that I can't afford this small purchase and I need some assistance.”

Should I pay off my HECS debt before applying for a home loan?

Michael said paying off your HECS debt could increase your borrowing capacity, but it was worth speaking to a broker first.

“If you have another liability like credit cards or Afterpay, you're actually better off closing them over your HECS in some cases,” she said.

“If your HECS is really low, like it's only going to cost you a couple of grand to close, it may be OK.

“But if you can’t close the whole HECS debt, you are still reducing your borrowing capacity by the same amount.”

Lou said she didn't end up paying off her HECS debt, however, a broker advised her this could be an option for her to consider and then buy with a smaller deposit utilising the First Home Guarantee scheme.

Should I close my Afterpay account before applying for a home loan?

Michael recommended people close any debts, like Afterpay, they didn’t need before applying for a home loan.

“In cases where the Afterpay is small, it would look much better to pay it off and not have the bank know about it, because Afterpay looks like a payday lender and you need some assistance until you next get paid,” she said.

If you are getting pre-approval for a home loan, Michael said you could make closing your Afterpay account a condition of the loan as Lou did.

"Once you find a property, then you provide proof that you've closed it. Otherwise, some people go through years without finding their home and they've just put their savings into closing a facility they didn't need to close," she said.

Lou noted she had been using Afterpay for three years and had never fallen behind on a repayment. She said she only had around $16 outstanding on her account.

“I had to close that balance off before I could progress my home loan,” she said. “I had like one payment left but it doesn’t matter.”

After closing her Afterpay account, Lou said she was approved for a $450,000 home loan and went on to purchase a two-bedroom, two-bathroom apartment in Western Sydney.

Get the latest Yahoo Finance news - follow us on Facebook, LinkedIn and Instagram.