Brokers have welcomed the moves to write off 20 per cent of student debt, but several have warned that the change may not be far-reaching for borrowers.
The Australian Taxation Office (ATO) has begun automatically applying a one-off 20 per cent reduction to eligible student loan balances, which is expected to wipe approximately $16 billion in total debt and improve home loan borrowing capacity for affected Australians.
The move – which is part of a campaign promise from the Albanese government – has been broadly welcomed by the broking industry. However, several brokers have suggested that the end effect may not shift the needle for potential home loan borrowers.
A capacity boost for lower balances
Speaking to The Adviser, GSC Finance broker Matt Turner said: “I am always in support of assisting people with reducing costs of education and training, and believe, overall, the 20 per cent reduction will assist current and past students in becoming debt-free sooner, which is a good thing.
“It may unlock some capacity for borrowers with lower balances, as the HELP repayments are based on income, rather than balance but with changes in lender policies to reduce the repayments, or set aside altogether, they may be in a position to borrow more if their balance now meet lender metrics.”
The Victoria-based broker continued that his team will now include the reductions in servicing calculations (even if the lender sets it aside), as it is still a liability a client needs to make payment on (like a credit card, car loan, etc).
Political football that will have a minimal impact on borrowers
However, Jonathan Preston, senior mortgage broker at Home Loan Experts said he believed the change would not “move the needle” for many borrowers.
He told The Adviser: “It really helps those who are new graduates but I don’t think it will make a meaningful difference to most borrowers, I think it is more political theatre than anything. If you owe $50,000 and now it’s $40,000, is that really going to change whether you can buy an $800K house? Probably not.
“And if you owe $100,000, $20,000 off is great but you still have $80,000 of HECS debt; so a 20 per cent reduction in the cost of clearing it won’t be a gamechanger. That’s why I consider this political theatre.”
Preston estimated that fewer than 1,000 people nationally would be able to buy a home now as a result of this change, if not less than 100.
He said the change may also create an uneven playing field: “I would say this is unfair and should be applied equally, which means those who do not have HECS debt should be given a tax break this FY for the same amount as the average HECS cut.
“Some people worked extra jobs to pay their studies in cash instead of relying on the government and are now being punished for working hard,” Preston said.
Lender policy changes will be the real shift
Broker brothers Elijah and Lucas Barrett, of Mortgage Choice Bayside, agreed and told The Adviser that they believed that while a reduction in debt of any kind was “always a positive and welcomed initiative”, there are “more effective ways to make a bigger difference when it comes to young people and home ownership”.
Elijah Barrett noted that the brokerage has many clients with HECS debt, revealing that many clients are talking about this at the moment.
He said: “The initiative means that young Australians are in less debt, which is great, but it isn’t the key and most beneficial way to get more young people into home ownership.
“Historically, when banks assess servicing, the HECS balance itself has never been the main factor. The monthly repayment is what historically affects borrowing capacity. The real positive shift, which has been welcomed across the industry, has been lenders changing how they treat HECS. Some now exclude it entirely from servicing, and others will ignore it when certain criteria are met (e.g. if the balance is below X). This is where the 20 per cent reduction actually helps.”
Nevertheless, the Mortgage Choice broker said: “Even though it doesn’t dramatically move servicing on its own, it brings more young borrowers under the thresholds required for those lender policies. Hitting those criteria means more people now qualify to have their HECS excluded, and that can make a meaningful difference for the clients who fall into that bucket.”
Lucas Barrett added: “For a lot of our customers whose HECS balances sit above the exclusion thresholds, this reduction won’t dramatically change their borrowing power. Their servicing remains largely the same. That said, many of our clients and social media followers are in the age group where HECS is a big part of their financial picture, so it’s still worth breaking down what the change actually means.
“If we are to advertise anything in regards to HECs, it will be the fantastic lender policy shifts around how HECS is treated in servicing, not the 20 per cent cut specifically.”
Repayments remain the key factor
However, Cara Giovinazzo, senior mortgage broker and director at Borro, added she thought it is “a really positive step for borrowers”.
She told The Adviser: “Even though HECS repayments are still calculated based on income, the lower balance can still influence how some lenders view overall liabilities. It can help reduce debt-to-income (DTI) ratios with certain banks, and with ongoing discussions about APRA and potential DTI tightening next year, having a smaller HECS balance could place some borrowers in a stronger position.”
But she added that when it comes to borrowing capacity, the impact “really depends on the lender”.
“Some lenders have HECS alternative servicing models that can actually give a borrower more borrowing capacity with a HECS debt than without one because they reduce the 3 per cent servicing buffer to 1 per cent,” she explained.
“Other banks take a lighter approach to HECS, but it varies, and it is rarely consistent across the board.
“HECS debt is a huge consideration at the moment, with many more first home buyers entering the market under the expanded 5 per cent Deposit Scheme. This is typically the market where we see the biggest impact that HECS/HELP debt can have on borrowing power, and with property prices rapidly increasing, maximising your borrowing capacity has become more important than ever.
“This is why speaking to a broker is so important. We compare lender policies side by side and structure applications based on how each lender treats HECS so clients can maximise their borrowing capacity,” she said and noted that the brokerage was already reviewing clients who hold HECS or HELP debts, updating servicing where it makes sense, and letting clients know how their position may change following this reduction.
[Related: $16 billion in student debt will be wiped this month]
