Navigating Home Loans: How Student Debt and Buy-Now-Pay-Later Schemes Impact First-Time Buyers

In a market where affordability is a growing concern, young Australians are finding their financial decisions can make or break their dreams of homeownership. A Sydney woman's experience reveals the surprising impact of HECS debt and Afterpay accounts on securing a mortgage, shedding light on the challenges faced by first-time buyers in today's housing landscape.

Unlocking the Door to Homeownership: Overcoming the Hurdles of HECS and Afterpay

HECS Debt: A Double-Edged Sword for First-Time Buyers

For 22-year-old Sydney resident Lou, her HECS debt and Afterpay account nearly derailed her plans to purchase her first home. Despite saving a substantial deposit of over 0,000, Lou found herself rejected by major banks when applying for a mortgage, primarily due to the burden of her student debt. Through her experience, Lou discovered that her HECS debt reduced her borrowing capacity by a staggering ,000 to ,000, depending on the lender.This revelation was a significant shock for Lou, who had not fully grasped the impact her HECS debt would have on her ability to secure a home loan. As a full-time tech worker and final-year university student, Lou's financial situation seemed well-positioned, but the compulsory HECS repayments proved to be a significant obstacle.Mortgage brokers have reported similar experiences with their clients, explaining that lenders focus on the impact of HECS repayments on an individual's take-home pay, rather than the overall size of the debt. This means that even those with relatively low HECS balances can face substantial reductions in their borrowing capacity.

Afterpay: A Double-Edged Sword for First-Time Buyers

In addition to the challenges posed by HECS debt, Lou also had to contend with the impact of her Afterpay account. While Afterpay is not directly recorded on credit reports, it can still be factored into a lender's assessment of an applicant's creditworthiness.Mortgage broker Marina Michael explained that debts like Afterpay and credit cards are typically viewed as reducing borrowing capacity on a one-to-five ratio. This means that for every ,000 in credit limits, an individual's borrowing capacity could be reduced by approximately ,000.Beyond the impact on borrowing capacity, Afterpay can also reflect negatively on an applicant's character as a borrower. Lenders may interpret the use of buy-now-pay-later services as an indication that the individual struggles to afford smaller purchases, raising concerns about their ability to manage a mortgage.

Navigating the Path to Homeownership

To overcome these obstacles, Lou was required to close her Afterpay account as a condition of her home loan approval. Despite having a clean repayment history and a relatively small outstanding balance, the mere presence of the account was enough to raise concerns for the lender.For those facing similar challenges, experts advise paying off or closing any unnecessary debts, such as Afterpay or credit cards, before applying for a home loan. While HECS debt may be more challenging to address, it is worth exploring options with a mortgage broker to determine the best course of action.In some cases, paying off the HECS debt entirely may increase borrowing capacity, but this approach should be carefully considered, as the savings used to pay off the debt could also impact the available deposit. Alternatively, a broker may recommend exploring alternative financing options, such as the First Home Guarantee scheme, which could provide a path to homeownership with a smaller deposit.Ultimately, the experiences of young Australians like Lou highlight the need for greater awareness and understanding of the financial factors that can impact first-time homebuyers. As the housing market continues to evolve, it is crucial for prospective buyers to seek professional guidance and proactively manage their financial profiles to maximize their chances of securing a mortgage and achieving their homeownership dreams.