HECS payment or HOUSE deposit?

[barry2104]

Hi All
Apologies if this isn't exactly a Property-related question, I only ask because I'm considering purchasing a property right now, but at the same time am considering paying off my HECS completely instead.

I've got a HECS debt of approx $12k and also some savings equating to 20% of a FHO deposit. I haven't bothered putting in any "voluntary" repayments towards HECS because I (as most others) think of it as a loan at which i can get the best interest rate possible, which is simply equal to inflation (i.e. it changes yearly).

I've just done the math though, and am considering postponing the property purchase for another few months to be able to pay off my HECS completely. Reasons/maths as follows:

-Say you've got a bill of $20,000 (nice round number).
you could continue to pay this balance off from your AFTER-tax salary at a nominated rate (rate is relative to salary, but usually around 6% give or take). If you paid off say $4k/yr, and you get hit with a 4% inflation/yr on average (has been consistently that high for my last few HECS bills), then after the first year of paying $4k, you get an extra $800 (4% inflation) lumped on to your sum before you actually get it paid at tax time, even though you've been putting money aside monthly. Doesn't work like a normal loan repayment for those in the know...

So your yearly balance would be:
Year 1: $20,800>$16800 ($800 inflation)
Year 2: $17,472>$13,472 ($672 inflation)
Year 3: $14,011>$10,011 ($539 inflation)
Year 4: $20,800>$6411 ($400 inflation)
Year 5: $20,800>$2667 ($256 inflation)
then 2/3 through the 6th year you've paid off the final amount, assuming you continued at $4k/year (this should naturally rise in line with your salary but for the maths lets keep it simple)

So after 5 years you've paid nearly $2800 extra just for inflation, bringing your total amount paid to $22800 or thereabouts

COMPARE THIS with paying the whole thing off at year 1, and hence qualifying for a 10% discount (standard discount, or at least it is in Qld!). You pay upfront $18k, meaning a $4800 SAVING compared to the first option.


now i know that these numbers shouldn't be compared because one is a 2009 value and the other would be a 2014/15 currency, but you could consider also that you can invest in some of the difference and start to get further ahead... i think? either way, that still looks like a pretty significant saving!

My question is, if for whatever reason you didn't want to buy a property with the $80k you had sitting in the bank, would you get rid of your one and only debt?

sorry for the long post - i don't imagine this will get many responses but any will be appreciated! I imagine most on this forum haven't had to deal with hecs for a loooooong time!

 

[barry2104]

a couple more things to add:
I understand that the inflation % for HECS will/should never be as high as a mortgage repayment, but this is a case for what to do with money if you WEREN"T to buy a house. Earning 4.5% interest on this $18,000 might get you slightly ahead of the amount that HECS is increasing each year due to inflation, but you've got to give 1/3 of that back to the taxman anyway, putting you behind

so would you be better off paying the HECS rather than have it in a 4.5% ING account for example?

To work out the balance point, you'd need to be able to get >1.42x the "inflation" % for your savings account to be ahead, assuming you were taxed at 30%. This increases to 1.67x if you're in the 40% tax bracket. I suppose that's just equivalent to a 6.67% savings rate if the inflation was consistently 4%, which I can see happening perhaps in a couple of years time

i think i answered my own question now... is there a delete button for threads!? haha

 

[Alex P Keaton]

i wouldnt bother paying off the hecs bill in full!! The interest rate on it is so low.

I'm on $48 K pa and every fortnight a set amount is deducted from my pay. A year ago when I bought my first ppor I owed about $12 K of HECS debt. Now a year later I owe $7 K and im still just paying the minimum hecs amount. Thats fine by me, i cant feel any effect on me.

It didnt effect the loan amount I could borrow when I applied for my loan or servicability either. Check out past threads on HECS here. Weigh up the pros and cons but I think its more whortwhile for you to put your money towards your deposit.

Now if your hecs debt had a 20% IR, then I'd be getting rid of it ASAP, but its not, its a piddly little amount.

 

[MikeF]

i wouldnt bother paying off the hecs bill in full!! The interest rate on it is so low.

I'm on $48 K pa and every fortnight a set amount is deducted from my pay. A year ago when I bought my first ppor I owed about $12 K of HECS debt. Now a year later I owe $7 K and im still just paying the minimum hecs amount. Thats fine by me, i cant feel any effect on me.

It didnt effect the loan amount I could borrow when I applied for my loan or servicability either. Check out past threads on HECS here. Weigh up the pros and cons but I think its more whortwhile for you to put your money towards your deposit.

Now if your hecs debt had a 20% IR, then I'd be getting rid of it ASAP, but its not, its a piddly little amount.

HECS repayments form part of your PAYG tax deductions and so reduces your net income which then effects the amount you can borrow.

eg On a gross annual income of $48,000 and HECS repayments of 4% ($1,920pa) maximum borrowing capacity based solely on net income would be reduced by as much as approx. $25,000 depending on the lender.

 

[marg4000]

Kim5 wrote:
It didnt effect the loan amount I could borrow when I applied for my loan or servicability either.

My son had a different experience.

He found that when he applied for a loan he had great trouble with the HECS debt. He only owed about $5K, and had actually made PAYG payments during the financial year that would wipe out the debt, i.e., he owed nothing. The bank could not get their heads around it, insisted that the $5K was a debt. The fact he was getting a 100% loan may have been a factor.

In the end he paid the $5K (less the discount) AGAIN so that he could give the bank the receipt and the evidence the debt had been paid. Loan went ahead and he got a nice tax refund.

This was about 3 years ago so things may have changed, but DO be prepared for the HECS debt to be factored in.
Marg

 

[JamesGG]

COMPARE THIS with paying the whole thing off at year 1, and hence qualifying for a 10% discount (standard discount, or at least it is in Qld!). You pay upfront $18k, meaning a $4800 SAVING compared to the first option.

I like to take a simple approach to these sorts of things. So, a simple question;

Can you use $18k to create more than $4.8k within five years?

The complicating factor, as someone already pointed out, is servicability. When that becomes a problem, then it might be worth looking at. Note that a paygw variation (if you use one to help with cashflow for any negative gearing you might have) will take HECS/HELP debts into the equation so net income can still increase this way, too.