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Ever felt like your uni degree is following you around… especially now you’re looking at home loans? You’ve done the hard yards: saved a solid deposit, cut back on the smashed avo toast, and spent your weekends scrolling through real estate listings. You’ve found a place you can picture yourself in, but there’s a nagging question in the back of your mind: “What about my HECS debt?”
For millions of Australians, this is a huge source of anxiety. You start asking yourself: Will the banks even look at my home loan application? Is this student debt killing my dream of owning a home? It’s a valid concern, but let’s start by getting one thing straight: HECS debt isn’t like other debts. There are no debt collectors, and it doesn’t hover over you with high interest rates. In the world of finance, it’s considered “good debt.”
However, when you step into the world of mortgages, this “good debt” suddenly becomes a critical factor in a lender’s calculations. Understanding how it works is the first step to taking control of your financial future.
First, Let’s Be Clear: How HECS-HELP Debt Actually Works
Before we dive into the banking side of things, let’s have a quick refresher. The Higher Education Loan Program (HELP), most commonly known as HECS, is the government’s brilliant scheme to make university accessible. You study now, and pay later.
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Here’s what you need to remember:
- It’s (mostly) interest-free: Your HECS debt doesn’t accumulate interest like a credit card or personal loan. Phew.
- But it is indexed: Each year, on June 1st, your outstanding balance is “indexed” to keep up with the cost of living (inflation), based on the Consumer Price Index (CPI). In recent years with higher inflation, this HECS indexation rate has been significant, meaning the total debt can still grow noticeably.
- Repayments are automatic: Once you start earning above a certain amount, known as the HECS repayment threshold, your employer automatically deducts repayments from your pre-tax salary. The more you earn, the higher the percentage of your income is paid towards the debt.
The Million-Dollar Question: How Do Lenders *Really* See Your HECS Debt?
This is the core of the issue and the part that trips most people up. When you’re sitting in front of a lender, you might think they’re looking at your $40,000 HECS balance and immediately reducing your borrowing power by that amount. That’s not how it works.
It’s All About Your Repayments, Not the Total Debt
Lenders are primarily concerned with one thing: your ability to service a loan. They need to be confident that you can make your mortgage repayments each month without financial stress. To do this, they calculate your Debt-to-Income (DTI) ratio and your net disposable income.
Your compulsory HECS repayment is seen as a recurring liability—just like a personal loan or a car payment. It reduces the amount of money you have available each year to pay for a mortgage.
Financier’s Key Insight: Lenders don’t really care about your total HECS debt of $40,000. They care about the ~$4,000-$5,000 that comes out of your salary each year to pay for it. This annual repayment is what directly impacts your borrowing power.
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Let’s Run the Numbers: A Real-World Example
Words are one thing, but numbers make it crystal clear. Let’s imagine an applicant named Sarah.
- Sarah’s Gross Annual Income: $90,000
Based on the 2024-2025 ATO thresholds, an income of $90,000 puts her in the 5.0% repayment bracket.
- Her Compulsory HECS Repayment: $90,000 x 5.0% = $4,500 per year (or $375 per month).
So, when the bank assesses Sarah’s application, they don’t see an income of $90,000. They see her income after her necessary HECS liability. For their serviceability calculation, her effective annual income is closer to:
$90,000 – $4,500 = $85,500
This $4,500 reduction might not seem like much, but in the world of mortgages, it can have a huge impact. Depending on the lender and the current interest rates, this reduction in annual income could decrease her total borrowing power by anywhere from $50,000 to $60,000. For someone trying to get into the property market, that can be the difference between buying a home and continuing to rent.
Want to see how this applies to you? Use an online Borrowing Power Calculator. First, enter your income and expenses normally. Then, run it a second time, adding your annual HECS repayment as a recurring monthly expense. You’ll see in real-time the impact it has on the final number. It’s a powerful reality check.
The Great Debate: Should You Pay It Off Early?
Seeing those numbers, your first instinct might be to throw every spare dollar at your HECS debt. But hold on, mate. It’s not always the smartest financial move. You need to consider the opportunity cost.
The Case FOR Paying It Off Before a Home Loan
- Instantly Boosts Borrowing Power: The moment your HECS debt is gone, those compulsory repayments stop. Using our example, Sarah’s assessable income immediately jumps back to the full $90,000, restoring that $50,000+ in borrowing power.
- Peace of Mind: There’s a powerful psychological benefit to being debt-free. It simplifies your finances and removes one more thing to worry about.
- Stops Indexation: You’ll avoid any future increases to your total debt from the annual indexation.
A Crucial Note on Timing: Paying off your HECS isn’t instant. After you make a voluntary repayment, it can take several business days for the ATO to process it. You will need to provide your lender with proof (like a screenshot of your cleared ATO portal balance) to confirm the debt is gone and that compulsory repayments will cease. Plan this well in advance of your formal home loan application.
The Case AGAINST Paying It Off: The Power of Your Deposit
- Your Deposit is Your Golden Ticket: The biggest hurdle for most first home buyers isn’t serviceability; it’s saving the deposit. Using $40,000 to pay off HECS means that’s $40,000 you don’t have for your deposit.
- Avoiding LMI is a Better Win: A larger deposit might help you reach the magic 20% mark, allowing you to avoid Lenders Mortgage Insurance (LMI), which can cost thousands. Saving $10,000 on LMI is a much better financial outcome than clearing a low-cost HECS debt.
- Opportunity Cost: HECS is a cheap debt. The money you’d use to pay it off could potentially work harder for you in an offset account against your future mortgage.
Beyond Paying It Off: 3 Smart Strategies to Boost Your Borrowing Power
The decision isn’t just about paying off HECS or not. You can be proactive and improve your financial position in other ways. Here are some strategies that can help “fix” a borrowing power shortfall.
1. Tackle High-Interest Debts First
Before you even think about making a voluntary repayment on HECS, look at your other debts. A $10,000 credit card balance at 20% interest is a massive red flag for lenders and costs you a fortune. Clearing that debt will have a far greater positive impact on your serviceability than clearing $10,000 of HECS. Always prioritise high-interest consumer debt.
2. Showcase All Your Provable Income
If you have a consistent side hustle, make sure that income is declared on your tax returns. Lenders can take this secondary income into account, which can help offset or even completely negate the impact of the HECS repayment on your borrowing power. Consistency is key here; a one-off gig won’t count.
3. Partner with a Pro (A Good Mortgage Broker)
This is an expert tip: not all lenders view your finances in exactly the same way. Some are more conservative, while others might have slightly more flexible calculations for certain liabilities. Instead of applying blindly, work with a reputable mortgage broker. Their job is to know the different lender policies inside and out. They can guide you to a lender whose policies are more favourable for your specific situation, potentially making all the difference.
Frequently Asked Questions (FAQ)
Does my HECS-HELP debt affect my credit score in Australia?
No. HECS-HELP is an agreement with the Australian Government, not a commercial credit provider. It is not reported on your credit file and does not impact your credit score.
What is the current HECS indexation rate and how is it calculated?
The indexation rate is linked to the Consumer Price Index (CPI) and changes annually. It’s calculated by the Australian Bureau of Statistics and applied by the ATO on June 1st each year. You can find the current rate on the ATO website.
Can I use my superannuation to pay off my HECS debt early?
No. Your super is locked away for your retirement. There are very few, strict conditions for early release, and paying off a HECS debt is not one of them.
The Final Verdict: HECS is a Hurdle, Not a Wall
Your HECS debt is not a financial life sentence. It is simply another factor in the home loan equation that needs to be understood and managed. For the vast majority of Australians, it’s a hurdle, not an insurmountable wall.
The key is to focus on what you can control: building a strong savings habit, eliminating high-interest debt, and understanding how your income and liabilities look to a lender. With the knowledge and strategies from this guide, you can now have a much more confident conversation with a financial professional and build a plan that works for you.
The great Australian dream of owning a home is still very much within your reach.
