HECS or Offset

Chr1 on 31/05/2022 - 14:15

Hi everyone

I currently have a 42k HECS debt that is about to get indexed at 3.9%. At the same time my offset is maxed out until July, when I can refinance my fixed loan, so there is no point adding funds to this account for now.

Between wiping my HECS debt or waiting until July, when I can refinance and then lower my mortgage, what would you recommend?

I appreciate that a lot of people would say to invest any additional funds but don’t know enough about it. I don’t have a real goal in terms of renovating or buying another property. Just want to minimise interest paid.

As always any feedback is appreciated!

Poll Options expired

  • 21
    Pay off HECS
  • 21
    Pay into offset later
Financial

Comments

  • KeeperX on 31/05/2022 - 14:20
    +9

    You might be too late to pay the HECS debt now, indexation will be applied tomorrow and it takes a bit of time for the payment to clear.

    • [Deactivated] on 31/05/2022 - 14:23

      took at least 2 days for mine to clear after i finished paying it off when i heard about the changes.

    • stirlo on 31/05/2022 - 14:38
      +1

      No might about it. You are definitely too late to make a payment and have it received before the index is applied.

      Don't despair though, if interest rates go up as everyone expects cash in the offset will save you more in the long run than HECS indexation costs you. The main time when it's worth doing is when you have under 2 years left on it (which unless you make bank 42k will be more than).

      • guppyshmuck on 31/05/2022 - 15:20

        The main time when it's worth doing is when you have under 2 years left on it

        Could you please explain to me why this time is the best time to pay off your HECS?

        • stirlo on 31/05/2022 - 16:06
          +1

          There’s a risk of paying it off earlier that if interest rates outpace inflation the value of your money in an offset will be more than the return you’re getting from just avoiding the index.

          In the final 2 years this changes. You have already paid through compulsory payments nearly half of the balance by the end of may year 1 (though these are not credited until after indexation date).

          You would then logically pay the full balance before indexation the year 2 (as otherwise you incur indexation on the remaining balance before having it reduced to 0 when your compulsory payments are applied).

          For this reason you might as well pay it off as a lump sum rather than having compulsory payments taken for the whole of year 2 (and needing to pay lump sum to avoid year 2 index).

          Considering paying in May of year 1 will save you 2 indexes and a year of compulsory repayments it’s generally a good idea.

          • guppyshmuck on 31/05/2022 - 18:16

            @stirlo: Thank you both, I will consider this option depending on my finances next year :)

        • djsweet on 31/05/2022 - 16:56
          +2

          I payed off my hecs for this exact reason. My compulsory repayments would pay off my hecs some time in the next 12 months. But because of the non-sensical way the ATO applies compulsory repayments, it would not be applied until post June 2023. Therefore I would end up paying for this indexation 1 June 22, and next indexation 1 June 23. So it makes sense for me to just voluntarily pay it off now and avoid 2 indexations. I part with the money a bit earlier but I’ll save at least $1500.

  • Stopback on 31/05/2022 - 14:20

    If you income is growing more than 4 percent a year

  • rsingh87 on 31/05/2022 - 14:22
    +5

    I would recommend paying the mortgage as if your out of a job you will still need to pay the mortgage, but you won't have to make payments towards hecs in that case

  • Muzeeb on 31/05/2022 - 14:33
    +6

    💰 ✌️ 🌜

    Rektrading - probably

  • rektrading on 31/05/2022 - 15:35
    +3

    Offset all the way.

  • whatwasherproblem on 31/05/2022 - 16:02
    +8

    Given that HECS is basically the nicest 'debt' you can have and that everyone is (correctly) pointing out that you're too late to get in before the indexation, I'm surprised that the poll is as neck-and-neck as it is.

    Anyway OP: pay into the offset. The HECS really doesn't matter for anything, and neither does its indexation.

    • rektrading on 31/05/2022 - 16:08
      +2

      Why would vote for HECS?

      • moar bargains on 31/05/2022 - 17:49
        +2

        The only time where paying HECS is a valid move is if you were going to pay it off that FY anyway, and you can get in before indexation. At least the second part is not true for OP, so not worth doing.

  • Keplaffintech on 31/05/2022 - 16:52

    Too late. Consider paying it next year before June 1st, depending on the indexation for 2023 and home loan rates at the time.

  • Chr1 on 01/06/2022 - 08:49

    Thanks everyone!

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