Federal Treasurer Jim Chalmers has instructed financial regulators to allow lenders to exclude student debts from their calculations in mortgage serviceability tests.

Under the current system, student loan debs, such as HECS or HELP balances, are counted as debt in the same way as credit card or personal loans, effectively restricting how much a home loan applicant can borrow.

Mandatory repayments also eat into take-home incomes, which can affect borrowing capacity.

Critics have long pointed out that student debt is not the same as it doesn’t need to be repaid unless a person earns at least $54,435 a year and if they lose their job, repayments are suspended.

Dr Chalmers has instructed both the banking regulator APRA and the non-bank lending watchdog ASIC to ease restrictions around student debt in home loan applications.

When will borrowers see the effect?

Non-bank lenders are expected to ease restrictions sooner with ASIC confirming it will move quickly to implement changes to its guidance on the treatment of student debt.

See also: Banks vs credit unions vs non-banks: what's the difference?

APRA will now consult the banking sector, which is responsible for around 92% of Australia’s current home lending, on the changes in serviceability requirements and debt reporting.

APRA’s mortgage serviceability rules require banks to assess whether a prospective borrower would be able to still afford loan repayments if the cash rate was raised by three percentage points.

Currently, an Australian earning an annual income of $130,000 a year would be required to pay $10,400 a year towards their HELP debt.

Depending on lenders’ calculations, this can effectively lower home loan borrowing capacity by up to $100,000.

Boost to first home buyers

Westpac was the first to respond to the changes to the treatment of HELP loans in serviceability assessments, saying it will assist aspiring home buyers.

Dr Chalmers has described the changes as “common sense” that will help more Australians into a home.

Housing has become a battleground in the federal election, due to be held before or on 17 May.

Among other changes to come in will be a clarification of regulations that currently see property developers needing to pre-sell all units in a development before being eligible for bank finance.

APRA issued advice on construction lending in 2017 which some banks interpreted as requiring developments to be 100% sold before releasing finance for the building of new unit complexes.

Dr Chalmers claims this was not the intention, and APRA will clarify it doesn’t expect 100% pre-sales before finance is approved.

“[This] has limited housing supply as smaller developers often don’t have the capital to finance the start of construction without the support from the banks,” Dr Chalmers said.

The change is being touted as a measure to help relieve the country's housing supply crisis.

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