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Changes to HECS-HELP Debt Assessment by NAB
The National Australia Bank (NAB) has announced a significant change to its borrowing policy regarding HECS-HELP (Higher Education Contribution Scheme – Higher Education Loan Program) debts. Effective from July 31, the bank will no longer factor in student debts of $20,000 or less when assessing an individual’s borrowing capacity for home loans. This move aligns NAB with Commonwealth Bank, which was the first of Australia’s Big Four banks to adjust its policies around student loans in April.
According to NAB’s home ownership executive, Matt Dawson, this change is aimed at facilitating faster access to homeownership for many Australians, who have previously found HELP debt to be a barrier when seeking mortgages. Dawson stated, “For too long, HELP debt has been a roadblock for many Australians looking to buy a home.” From July 31, certain HELP repayments will no longer be included in NAB’s home lending assessment, potentially enabling customers to enter the property market sooner.
Background and Commonwealth Bank’s Policies
The Commonwealth Bank, which moved first in premium lending adjustments, ceased considering HECS debts for its serviceability assessments for debts expected to be repaid within the next 12 months. Additionally, for borrowers with HECS debts due within five years, the bank is trialling a reduction of the serviceability buffer from 3 per cent to 1 per cent. Currently, the Australian Prudential Regulation Authority (APRA) mandates a serviceability buffer of 3 per cent, which means lenders assess whether a borrower can repay a loan at an interest rate 3 per cent higher than the current rate.
This framework was reinforced in October 2021 when the buffer was increased from 2.5 to 3 per cent to protect borrowers during a period of exceptionally low cash rates, which stood at 0.1 per cent.
Impact of HECS-HELP Debt on Borrowing Capacity
Under conventional lending practices, HECS-HELP debt significantly influences a borrower’s financial assessment. For instance, NAB provided a hypothetical situation where a borrower earning $125,000, with average living expenses and a $5,000 credit card limit, alongside an average HECS-HELP debt of $26,500, would have a borrowing limit of $497,000. If this HECS debt were excluded, the borrowing limit could rise to $587,000—a notable increase of $90,000.
Government Initiatives
In related news, the Australian Government has proposed a bill aimed at reducing all HECS-HELP debts by 20 per cent, a commitment stemming from parliamentary pledges made during the last election. This initiative is expected to benefit approximately three million Australians, reducing the average HECS debt of $27,600 by $5,520. The proposed changes will be retroactively applied from June 1, preceding this year’s indexation adjustments.
Furthermore, the bill plans to raise the income threshold at which repayments commence from $54,435 to $67,000, in addition to lowering the minimum repayment amounts imposed on borrowers.
Conclusion
The adjustments made by NAB and the Commonwealth Bank signal a shift in the lending landscape aimed at increasing access to home ownership for Australians burdened by student debt. Coupled with government legislation intended to alleviate HECS-HELP debt, these reforms reflect an evolving commitment to enhance financial inclusivity within the housing market. Such changes are poised to have a lasting impact on how lenders perceive educational debt, potentially aiding thousands in realising their homeownership aspirations.
