Home Loan / HECS / Family Guarantor

L[Deactivated] on 17/05/2020 - 10:59

Hi,

Im 23, with a entry level job paying 65k/pa (this will increase with time as i work in a standard progressively yearly/18mth promoted role, but irrelevant for now)
Im wanting to enter into the market in the next 18 months for a property b/w 650-750k.
Almost saved up the 20% deposit (assuming 750k) so i think by the time it happens i will comfortably have the 20% on top of the upfront costs associated

Understand a lot will have the thought that I'm reaching for the moon atm but id like your two cent on the below:

As the deposit is not my issue, biggest issue is borrowing power taking income & HECs into consideration

  1. Have HECs debt of around 37k - should i pay off now? Will that increase borrowing power significantly? Bank dependent? Do all banks factor this into consideration?

  2. Can explore the option of family guarantor (yes everyone has different views on this) but the question is more, can that increase the amount borrowed or is it only more helpful for people who cant make the 20% deposit (therefore does not apply to me)

    Other info:
    Just using various borrowing power calculators, im getting roughly a 450k loan for a 1.8-2k monthly repayment.
    No issues with the repayment, infact can withstand more, but would want to explore all options of bumping the loan up to 550k-600k given my situation. Any thoughts? Impossible? Even with guarantor?

Thx!

Financial

Comments

  • thatonethere on 17/05/2020 - 11:05
    +1

    HECS is treated like any liability you have. So yeah if you pay it off no liability.

    • serpserpserp on 17/05/2020 - 14:24
      +2

      But would the bank rather see that you have 37k in cash and a 37k HECS or no HECS and no cash? Would be interested in what the answer would be there cause I think the former.

      • [Deactivated] on 17/05/2020 - 16:38

        Yes, wish there was a straight answer to this.

        • serpserpserp on 17/05/2020 - 17:13
          +3

          Lets face it, it is the former. The bank cares more about your ability to service your loan than anything else. So your borrowing capacity is lower because you have a HECS debt, that is a good thing. Just find something that is 750k instead of maybe 800k and you'll pay it off sooner and have 37k sitting in your offset.

        • norrisrules on 17/05/2020 - 18:09
          +4

          Never pay your hecs debt off. Regardless of whether it affects serviceability, you're better off with the cash

          • belesci on 17/05/2020 - 22:06

            @norrisrules: Agree HECS basically just adds Inflation , on the other hand you’ll be saving interest from your home loan.
            7th year working and still paying it off lol, will finish in around 10 yrs hopefully.

  • jimbobaus on 17/05/2020 - 11:33
    +1

    you can get a home loan with 5% Deposit if it is your first home

    https://www.canstar.com.au/home-loans/first-home-loan-deposi…

    • El-Rhi on 17/05/2020 - 11:38
      +1

      Not if OP is looking at property in the range of $650-$750k

      • jimbobaus on 17/05/2020 - 12:20

        Just saw OP was in Vic, its 700K in NSW Hence my comment .

    • afah0447 on 18/05/2020 - 12:38

      Price range could be a problem here. It feels a little too high to me.

  • donaldlj on 17/05/2020 - 11:33
    +2

    Previously if you paid of your HECS early you received a 10% discount. Is this still the case?

    • barozgain on 17/05/2020 - 11:37
      +1

      no was phased out from 2017

      • donaldlj on 17/05/2020 - 11:44
        +2

        Ok. In that case I personally would not pay of the HECS early. I would rather keep that money in an offset account in case down the track you have problems servicing the loan. In these times, you can never say your job is gauranteed

        • [Deactivated] on 17/05/2020 - 12:18

          Think the main thing is trying to get borrowing power higher, but apart from that i would agree too.

          • original15 on 17/05/2020 - 14:24

            @[Deactivated]: At your salary range though the amount coming out of your income is not high. Might depend on the bank you check with however a guy we dealt with said the main impact my HECs has on borrowing power was what it was subtracting from my income, not necessarily the amount I had owing..but then again another banker told us the opposite.
            At 65k it would only be a small portion of income going towards HECs, so if you choose to pay it off you’d want to be absolutely sure the fact it is a ‘debt’ rather than the impact on fortnightly impact is what makes a difference

            • [Deactivated] on 17/05/2020 - 16:38

              @original15: Thanks for this!

  • El-Rhi on 17/05/2020 - 11:36
    +6

    1 - HECS is always factored in either as a liability or as reduced income. Either way it has the same impact on borrowing power. If you pay it off before going for a loan, it will probably add around $70k to your borrowing capacity.

    2 - Family guarantor won’t increase your borrowing capacity as the guarantors income isn’t factored into serviceability, only the security they’re putting up which will reduce the LVR of the loan (usually guarantors are used to get the loan below 80% to avoid LMI)

    • p-plater on 17/05/2020 - 12:37

      Thanks for this quite insightful.
      Also confirmation on no increase in borrowing power is good to know too so will need to look at other avenues.

    • Ghost47 on 17/05/2020 - 13:27

      Thing is though, OP could invest the money they would use to pay off HECs and very likely (even considering global economic factors currently) make a better return over time… at the cost of borrowing power now.

  • mortgagebroker on 17/05/2020 - 11:48
    +3

    Go see a mortgage broker.

    Adding the family guarantee will not be needed.
    Your issue is borrowing capacity so a family guarantee will not help as you still need to be able to service to loan.

    Try different lenders to get the highest borrowing power.

    If needed pay off your HECS to improve your borrowing power and use less deposit.

    Do what will save you the most money and let you achieve your goal.

    Not sure where you are looking to purchase but have a look at the FHLDS to see if you qualify.

    • p-plater on 17/05/2020 - 12:39

      Yes think will need to look into mortgage brokers for initial conversations.
      Ozbargain, anyone got good ones to recommend, melbourne cbd / eastside?

      • Skramit on 17/05/2020 - 12:49

        Turn on your PMs

        • p-plater on 17/05/2020 - 13:10

          Thx, lmk!

  • barbarella on 17/05/2020 - 12:14
    +4

    Consider waiting a year or so as property prices might fall due to our present financial predicament??

    • mskeggs on 17/05/2020 - 12:26

      But also likely to tighten lending standards.
      Since the OP is due pay rises in the years ahead, i’d personally aim to save for 36 months and 2 pay rise cycles and have a higher deposit.

  • Emerald Owl on 17/05/2020 - 12:29
    -1

    I’d be renting for a year or so. There are a lot of vacancies due to temporary migrants going home, less Airbnb’s, etc.

  • p-plater on 17/05/2020 - 12:41

    Im in a similar situation as OP, anyone have Good recommendations for mortgage brokers?

  • pjetson on 17/05/2020 - 13:42
    +10

    You must be living a very low-cost lifestyle to have saved $150k on a $65k wage in just a couple of years. Good for you!

    I'm getting roughly a 450k loan for a 1.8-2k monthly repayment

    Have you worked out whether you can afford that on a $65k wage? You'll have a lot of ongoing bills that you (apparently) didn't have before, such as water and council rates, electricity and gas bills, internet, food, furniture, clothing, travel, maybe car payments/insurance/registration, and so on. Honestly, once you own a property, everyone seems to have their hand out…

    I apologise if it sounds like I'm trying to rain on your parade, but my youngest son (24yo) is in a somewhat similar position to you, and he hadn't considered much beyond getting to the 20% deposit and then looking at properties.

    • The Wololo Wombat on 17/05/2020 - 15:52

      Rent out some of the rooms to some mates. Easy. He can afford it… plus if he can save 150k on that wage, he can afford the repayments on that wage.

      • pjetson on 17/05/2020 - 16:01
        +1

        I think $65k after tax is about $51k. Perhaps the OP has a secret "high-yield investment vehicle" he didn't mention?

        • Wickz on 17/05/2020 - 16:15
          +4

          Pretty sure it’s called living with your parents and not paying anything towards rent, bills, food, etc etc. :)

          It’s a great way to save if you can do it, but I moved out at 20 and have been paying everything on my own ever since (16 years).

          As others have said, the 20% saved is fantastic, but you might not be considering the actual costs of living and servicing a loan. It’s very different in reality. See a broker.

      • afah0447 on 18/05/2020 - 12:43

        That's assuming the OP saved the inital $150k. I think OP probably got it via some windfall gain given their young age. OP you don't need to answer that.

    • [Deactivated] on 17/05/2020 - 16:33

      Thank you for this actually, need a devils advocate to be able to see it from all aspects.

      Currently actually paying the utilities at home actually but yes definitely additional costs on the way. Need to think about whats left for precautionary savings etc.

      Good luck to your son as well, sounds like hes getting some good advice!

  • DuckKnight on 17/05/2020 - 14:35
    +4

    If you decide to pay off your HECS debt, do it before June 1 to avoid indexation for this year.

    • Shadowsfury on 17/05/2020 - 16:23

      Slightly off topic for the OP but seems the indexation is already in parliament - 1.8% this year.

      Which oddly nowadays means its worse than the interest you'll get from the bank in most cases (before or after tax)

      • [Deactivated] on 17/05/2020 - 16:34

        Not sure if stupid q, When does the 2020 index rate come out? 1 july? Or are you saying its staying at 1.8?

      • LemonShapedRock on 17/05/2020 - 17:40

        I thought it goes off the March inflation data from the RBA (which was 2.2%) - Where did you see it was 1.8%? That's what it was for 2019

        • archiexyz on 18/05/2020 - 13:59

          ATO was less than helpful when I contacted them about this year's rate the other week but I found the instructions on how it is calculated here: https://community.ato.gov.au/t5/Study-loans/Indexation-rates…
          "The indexation figure uses a formula over two years that includes the latest March CPI- which is then applied to the account on June 1.
          The calculation sums the latest 4 index numbers that include March 1 and divides this by the previous year’s 4 index numbers to arrive at the indexation factor for the loan balance."

          And based on that yes it will be 1.8% again.

    • Zachary on 18/05/2020 - 10:19

      whats indexation?

  • The Wololo Wombat on 17/05/2020 - 15:42
    +2

    Don't be quick to pay off your HECS imo. A higher deposit is worth more than a reduced borrowing capacity.

    This may not be the case if your borrowing capacity is the limiting factor… but don't just assume it's better to pay off HECS.

  • TheBilly on 17/05/2020 - 17:30
    +2

    Item 1… Wait till you are ready to buy and see what your broker recommends based on their analysis. I recently purchased another place and this time round they recommended I pay off HECS but in the other situations they did not as I was not as close to my serviceability limit.

    Item 2… Will only help with the deposit side which you have covered. Will not increase your serviceability unless you purchase as joint tennants which means they will use the other parties income and the other party will also own a part of your property. One thing to note you can split ownership at 99% to 1% so you own the major share.

    Note: banks do not use your salary as the benchmark of income, they use the figure that gets deposited in your account. I.e. 65k minus taxes super etc.

  • dasher86 on 17/05/2020 - 19:04
    +6

    $750k property on $65k salary might be over extending yourself.
    There will be additional buying costs like stamp duty.
    Future income is very relevant.
    I suggest keep saving and look at what you can afford in 18 months.
    Or look at more affordable houses.
    $750k on 3% over 30 years is $3,157 per month.
    $65k monthly cleared inc. HECS is $4,057.
    Even on an income of $90k you will clear $5,127.
    Not too mention if interest rates rise.
    People say 'mortgage stress' kicks in about 30%.

  • Drifta on 18/05/2020 - 02:02

    the only option i can think of is to save more (wait)/ get money from parents who may be able to redraw on their loan if they have one.
    Have you considered buying something cheaper?

    • [Deactivated] on 18/05/2020 - 11:32

      Yes, will re-adjust expectations as needed.
      Im just targeting specific areas/suburbs which greatly reduces my options. Not entirely a bad thing as theres no real rush, lets see how the market moves in the next 12 months once covid settles.

  • spammingb on 18/05/2020 - 10:50
    +1

    Don't pay off HECS, it's the cheapest loan you'll ever get! Use to work at a bank, they'd rather see you have savings and a larger deposit than having your HECS paid off

  • afah0447 on 18/05/2020 - 12:36

    With regard to HECS…i just got a home loan and they definitely do.

    As to whether you should pay it off or not, i wouldn't as it is only indexed and inflation is pretty low right now.

  • Existenz on 18/05/2020 - 14:11

    Also, consider purchasing an OTP (off the plan) property. If it's under $600k value, you won't pay stamp duty. Secondary, look into the FHOG (First homeowners grant) which will be $10k towards your home loan from the gov't.

    I wouldn't take these handouts for granted. Starting with a smaller loan at a young age with relatively low income is a better option. Build up your equity and put your money into an offset account. Win-Win.

  • Fever4shakin on 19/05/2020 - 10:50

    As others have pointed out the banks will consider the serviceability of the loans above all else. Taking into account Hecs and any other debts. It doesn't really matter how much you think you could pay per pay, but rather how much the bank thinks is reasonable taking into account living expenses. You're best off continuing to save and getting a bigger deposit to compensate for what the bank may not lend you. That way you could still get the 650k property on a 450k loan just with a 200k deposit.

  • jay9 on 20/05/2020 - 13:05

    Things that will increase your borrowing power:

    1. Paying off your HECS
    2. Telling the bank that you're going to live at home, and rent the place out. This makes it an investment property and an investment loan, however the rental income can be counted as another income, and your own accommodation costs can be considered quite low given your parents are willing to attest to that with a letter.
    3. You can then choose to live within the property within 12 months (if in VIC) and still be eligible for FHOG AFAIK - please check this as YMMV
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