Should You Pay Off Your HECS Debt Before Purchasing An Investment Property?
Dilleen Property Group 2021
Should a person pay off their HECS debt gradually or should they pay their HECS debt completely/in lump sums to increase their borrowing capacity?
A HECS debt is the debt you acquire from a university degree. They are repaid via the Australian tax system, and are only made payable once you earn a certain amount. There is also no interest charged on HECS loans.
Ultimately, the answer to this question will always depend on your current position. Personally, I’ve never been to university, so I don’t have a HECS debt. However, I know a lot of people out there that have been to university and do have a HECS debt.
A lot lot of lenders out there will still lend you money if you have a HECS debt, but it also depends on your personal financial position. If you have a borrowing capacity and you're able to buy a property that's strategically in line with your strategy and your goals, then personally I would purchase it. I would choose not to pay off the HECS debt.
If I went to a mortgage broker and they said you can borrow $400,000 while having a HECS debt, as well as $5,000 credit card, and $50,000 in savings, I would choose not to pay the debt off, and instead I would go and buy a property.
In the long term, if you decide to pay off your HECS debt instead of a property and use your savings, yes your borrowing capacity will go up, but now you don't have a deposit. Once again this is dependent on your position, because you may already have a property/properties and can release equity, so this may not apply to you.
When I was at my third property I had a $15,000 personal loan and I also had a $5,000 credit card. At this time, I was tossing up between paying off my personal loan and credit card or buy another investment property. I thought about it and did the numbers, and decided to choose purchasing an investment property as I knew I could service the loan due to working full-time. I bought a property because the one I found had strong capital growth, good cash flow, and it was below market value. I made $30,000 instantly on it because I bought the property below market value and refinanced it to release the equity. I used this strategy again and again to grow my portfolio.
This is just one scenario, but it’s important to note that if I didn't purchase the property and paid off the the debt with my savings, I would have very little of my savings left and wouldn't have been able to build my property portfolio.
However, another scenario could be that your HECS debt is hindering your borrowing capacity. If you chose to go down the path of paying off the full amount of the HECS debt rather than gradually, you may only receive a small boost in your borrowing capacity. It may even be that your personal income is hindering the serviceability of a loan.
To counteract this, a strategy that I used was working full-time and working a casual night job, that you will only have temporarily. I used this strategy and got a casual bartending job to boost my borrowing capacity. Once I received the loan, I chose to quit the bartending job because I didn't feel obliged to do it and I had a positively geared property that paid off itself.
There's thousands of different things you can do to avoid having to put all your hard-earned savings to pay off a debt. One way I like to think of not paying off debt, is that if you choose to buy multiple properties instead, in 20 years time if you choose the right types of properties that are positively geared, have good cash flow, and strong capital growth, you will have millions of dollars in property once they double overtime in value.
At the end of the day, there is no right or wrong answer as it will always depend on your current circumstances. However, personally I like to think of the long-term implications, and what is realistically going to help me build wealth so that I can meet my financial goals and secure a financially free future.
Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
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