How HECS Affects Borrowing Power: What Homebuyers Must Know

Many Australian graduates wonder if their student debt will prevent them from buying a home.

HECS-HELP debt reduces your borrowing power because lenders count the repayments as an expense when calculating how much you can afford to borrow, potentially limiting your loan amount by tens of thousands of dollars.

This happens even though HECS operates differently from traditional debts like credit cards or personal loans.

The impact varies based on your income level, debt size, and the lender’s assessment methods.

Some borrowers might find their borrowing capacity reduced by $50,000 to $90,000 depending on their HECS balance and repayment obligations.

Recent changes in 2025 may see some lenders taking a more flexible approach to HECS debt in their calculations.

Understanding how lenders view HECS debt helps graduates make better financial decisions when planning to enter the property market.

There are strategies to improve your borrowing position and work around these limitations.

Key Takeaways

• HECS debt reduces borrowing power because lenders treat repayments as ongoing expenses in their calculations
• Some lenders may ignore HECS repayments if you’re close to paying off the debt within 12 months
• Strategic planning and understanding lender policies can help graduates improve their chances of securing a home loan

What Is HECS and HECS-HELP Debt?

HECS-HELP is a government loan system that helps Australian students pay for university tuition fees and living costs.

These loans work differently from regular bank loans because repayments are automatically taken from wages once income reaches certain levels.

How HECS-HELP Loans Work

HECS stands for Higher Education Contribution Scheme, whilst HELP stands for Higher Education Loan Programme.

The government uses these loans to help students pay for their education without upfront costs.

Students don’t need to apply through banks or provide credit checks.

The Australian Taxation Office manages these loans directly with universities and training providers.

There are several types of HELP loans available:

• HECS-HELP: Covers tuition fees for Commonwealth supported university places
• FEE-HELP: Pays for full-fee university courses
• VET Student Loans: Covers vocational education and training courses
• SA-HELP: Helps pay the student services and amenities fee

The government adds interest to these loans each year.

This interest rate matches inflation, so the debt doesn’t grow faster than the cost of living.

Students can borrow up to set limits each year.

These limits change depending on the type of course and study load.

Repayment and Income Thresholds

HECS-HELP repayments only start when a person’s income reaches the minimum threshold.

For 2024-25, this threshold is $51,550 per year.

The repayment rate increases as income grows:

Higher earners pay up to 10% of their income towards their HECS-HELP debt.

The Australian Taxation Office collects these payments through the tax system, similar to income tax.

People living overseas must still make repayments if they earn above the threshold.

They need to lodge Australian tax returns and pay their HECS-HELP debt directly.

Differences from Other Debts

HECS-HELP debt works very differently from credit cards, personal loans, or car loans.

Traditional lenders require fixed monthly payments regardless of income changes.

Key differences include:

• No minimum monthly payment – repayments adjust based on current income
• No penalty for early repayment – borrowers can pay extra without fees
• Income-based repayments – payments stop if income drops below the threshold
• Government backing – no risk of default affecting credit scores

Banks and lenders traditionally counted HECS-HELP repayments when calculating borrowing power.

This reduced how much money people could borrow for home loans.

The debt doesn’t appear on credit reports like other loans.

However, lenders could see HECS-HELP repayments on payslips and tax returns during loan applications.

Unlike other debts, HECS-HELP debt gets wiped if the borrower dies.

Family members don’t inherit this government loan obligation.

How HECS Debt Directly Impacts Borrowing Power

HECS debt reduces borrowing power through mandatory repayments that lower disposable income and increase debt-to-income ratios.

Lenders treat these repayments as ongoing liabilities that directly compete with mortgage repayments for available income.

HECS Repayments and Serviceability

Banks assess HECS repayments as mandatory ongoing expenses that reduce available income for loan repayments.

Once income reaches the threshold, these payments become unavoidable deductions from salary.

Current HECS repayment rates include:

• 1% for income just above threshold
• 3% at $107,029 annually ($3,210 per year)
• Up to 10% for highest income brackets

Lenders calculate serviceability by subtracting all mandatory expenses from net income.

HECS repayments directly reduce this figure, limiting how much borrowers can allocate to mortgage payments.

The compulsory nature of HECS repayments means lenders cannot ignore them.

Unlike voluntary expenses, borrowers cannot reduce or eliminate these payments to improve their financial situation.

This creates a permanent reduction in serviceability calculations.

The liability remains until the debt is fully repaid through the tax system.

Debt-to-Income Ratio (DTI) Considerations

HECS debt increases the debt-to-income ratio by adding to total liabilities without providing offsetting benefits.

Lenders divide total debts by gross income to calculate this critical assessment metric.

The DTI ratio affects loan approval and borrowing capacity limits.

Higher ratios indicate greater financial risk and reduced ability to handle additional debt obligations.

HECS debt impacts DTI through:

• Adding to total debt obligations
• Creating ongoing repayment commitments
• Reducing available income for new loans

Banks prefer lower DTI ratios as they indicate stronger financial management.

HECS debt works against borrowers by increasing this ratio without providing tangible assets or immediate benefits.

The debt remains on the borrower’s financial profile until completely repaid.

This long-term liability continues affecting DTI calculations for years or decades.

Reduction in Loan Amount

HECS debt typically reduces maximum borrowing capacity by approximately 10 times the annual repayment amount.

This calculation reflects the direct impact on available income over the loan term.

A borrower paying $4,000 annually in HECS repayments might see their borrowing power drop by $40,000.

This reduction occurs because lenders must ensure sustainable repayment capacity throughout the mortgage term.

Borrowing power calculations consider:

• Annual HECS repayment amounts
• Loan term duration (typically 25-30 years)
• Interest rate buffers and stress testing
• Other ongoing expenses and commitments

The reduction varies between lenders based on their assessment criteria.

Some institutions apply more conservative calculations, further limiting borrowing capacity for HECS debt holders.

Income growth potential may offset some reduction.

However, lenders primarily assess current financial capacity rather than projected future improvements.

Income and Expenses Assessment

Lenders evaluate net disposable income by subtracting all expenses, including HECS repayments, from after-tax income.

This assessment determines actual capacity to service mortgage repayments.

The income assessment process treats HECS repayments identically to other mandatory expenses like personal loans or credit cards.

Banks cannot distinguish between debt types when calculating available income.

Assessment factors include:

• Gross and net income calculations
• Tax obligations and deductions
• HECS repayment requirements
• Living expenses and other commitments

Higher income earners face proportionally larger HECS repayments due to the progressive rate structure.

This can significantly impact borrowing power despite strong earning capacity.

Banks verify income through payslips, tax returns, and employment contracts.

HECS repayments appear as automatic deductions, making them impossible to exclude from expense calculations.

How Lenders Assess Applicants With HECS Debt

Banks evaluate HECS repayments as ongoing financial commitments that reduce available income for loan repayments.

The ATO provides verification systems that help lenders confirm current debt balances and repayment obligations.

Including HECS in Loan Approval Criteria

Lenders treat HECS debt differently from traditional loans like credit cards or personal loans.

They view HECS as a future income reduction rather than a current monthly payment.

Traditional Assessment Method:
Most banks calculate HECS repayments based on the borrower’s current income.

They estimate annual repayments using ATO thresholds and reduce borrowing capacity accordingly.

The assessment considers the borrower’s salary level and corresponding HECS repayment percentage.

Higher earners face larger percentage deductions from their available income.

New Assessment Changes:
Some major lenders now offer exceptions for HECS debt in loan approval criteria.

Commonwealth Bank introduced changes in April 2025 that modify how they assess HELP debt for home and investment loans.

From September 2025, qualifying borrowers may have HECS repayments excluded from serviceability assessments.

This change applies specifically to home loan applications and can increase borrowing capacity significantly.

Assessment of Financial Obligations

Lenders examine total debt obligations when evaluating loan applications.

HECS debt ranks lower in priority compared to credit cards, personal loans, and car finance commitments.

Debt Hierarchy:
Credit card limits affect borrowing power more severely than HECS balances.

Personal loans and car finance create fixed monthly payments that directly reduce available income.

HECS repayments only activate when income reaches minimum thresholds.

Borrowers earning below $51,550 annually face no HECS repayments, making their debt obligations effectively zero.

Income-Contingent Nature:
Lenders recognise that HECS repayments adjust automatically with income changes.

Job loss or reduced hours can temporarily stop HECS deductions, unlike fixed loan repayments.

This flexibility makes HECS less risky for lenders compared to other financial commitments.

Government loan structures provide built-in protection for borrowers during financial hardship.

Role of the ATO in Verification

The ATO maintains comprehensive records of all HECS-HELP debt balances and repayment histories.

Lenders access this information to verify borrower declarations during loan applications.

Verification Process:
Banks request ATO statements showing current HECS balances and recent repayment amounts.

These documents confirm the borrower’s actual debt level and payment history.

The ATO provides annual statements that detail remaining balances and projected repayment schedules.

Lenders use this data to calculate future payment obligations accurately.

Data Accuracy:
ATO records eliminate borrower estimation errors in loan applications.

Precise debt figures help lenders make informed decisions about loan options and borrowing limits.

The verification system prevents borrowers from understating their HECS obligations.

Complete transparency ensures responsible lending practices across all financial commitments.

The Influence of Indexation and Inflation on HECS Balances

HECS-HELP debt grows each year through indexation, which adjusts balances based on inflation rates.

Recent changes have modified how these adjustments work to reduce the burden on borrowers.

Indexation Rates and Annual Adjustments

The Australian Taxation Office applies indexation to all HECS-HELP debt on 1 June each year.

This process adjusts debt balances to maintain their real value over time.

Indexation rates vary significantly based on economic conditions.

Between 2013 and 2021, the average indexation rate was 1.76%.

However, rates have increased substantially since 2021, averaging 5.50%.

The 2022-23 indexation factor reached 7.1% due to high inflation.

In 2025, the indexation rate applied was 3.2%, showing how these adjustments can fluctuate year to year.

Key indexation timeline:

• 1 June each year: ATO applies indexation
• Calculation period: Based on previous year’s economic data
• Application: Automatic adjustment to all outstanding balances

Impact of Inflation and CPI

The Consumer Price Index traditionally determined HECS indexation rates. CPI measures the average price of goods and services across Australia.

High inflation periods directly increase HECS debt through higher indexation. When CPI rises, student debt balances grow faster than borrowers can often repay them.

This creates a compounding effect. Higher balances mean larger minimum repayments once income thresholds are reached.

Many graduates find their debt growing despite making regular payments.

Inflation impact examples:

• Low inflation (2%): Modest debt growth
• High inflation (7%): Significant balance increases
• Compound effect: Debt can outpace repayments

Recent HECS-HELP Indexation Changes

New legislation has changed how HECS indexation works from June 2024. The government now uses the lesser of CPI or Wage Price Index to calculate adjustments.

This change aims to prevent debt from growing faster than wages. When inflation exceeds wage growth, WPI provides a lower indexation rate than traditional CPI calculations.

The ATO will automatically process refunds for excessive 2023 and 2024 indexation. These refunds address periods when high inflation unfairly increased debt balances.

New indexation rules:

• Calculation method: Lesser of CPI or WPI
• Automatic refunds: For 2023-2024 periods
• Purpose: Align debt growth with wage increases

Strategies To Improve Borrowing Power With HECS Debt

Several practical approaches can help borrowers offset the impact of HECS debt on their borrowing capacity. These strategies focus on reducing other financial commitments and maximising savings potential.

Managing Other Debts and Expenses

Credit cards and personal loans significantly reduce borrowing power more than HECS debt. Lenders view these debts as higher risk because they carry higher interest rates and require fixed monthly payments.

Paying off credit card balances should be the first priority. A $5,000 credit card debt with minimum repayments can reduce borrowing power by $30,000 or more.

Personal loans also create substantial barriers to borrowing. A $300 monthly personal loan repayment might decrease borrowing capacity by $60,000 to $80,000.

High-impact debt elimination targets:

• Credit card balances (highest priority)
• Personal loans
• Car loans with high repayments
• Buy now, pay later arrangements

Reducing monthly expenses also helps improve borrowing calculations. Lenders examine spending patterns for three to six months before loan approval.

Subscription services, dining out, and entertainment expenses all factor into serviceability assessments. Borrowers should review bank statements and eliminate unnecessary recurring charges.

Prioritising Deposit Savings

A larger home deposit reduces the loan amount needed and demonstrates strong saving discipline to lenders. This approach often proves more effective than paying down HECS debt early.

Most lenders require a 5% to 20% deposit depending on the loan type. First-home buyers can access schemes with lower deposit requirements, but larger deposits improve borrowing power.

Deposit saving strategies:

• Open a dedicated high-interest savings account
• Set up automatic transfers after each pay
• Use government schemes like the First Home Super Saver Scheme
• Consider family guarantor options

Borrowers with 20% deposits avoid lenders mortgage insurance, which can cost thousands of dollars. They also access better interest rates and loan features.

Savings discipline shown over 6-12 months strengthens loan applications significantly. Consistent deposits into savings accounts prove borrowers can manage mortgage repayments.

Evaluating Early HECS Repayment

Early HECS repayment increases take-home income but uses funds that could build a home deposit. The decision depends on individual circumstances and current HECS balance.

HECS repayments stop when the debt reaches zero. Someone paying $200 monthly in HECS could potentially borrow an extra $40,000 to $50,000 after clearing the debt.

However, voluntary HECS payments don’t earn investment returns like deposit savings might through property growth. The opportunity cost varies based on property market conditions.

Consider early repayment when:

• HECS balance is relatively small (under $20,000)
• Current savings already cover deposit needs
• Interest rates are rising rapidly
• Planning to purchase in the next 12 months

Large HECS debts often require years to pay off voluntarily. This delay might mean missing property purchase opportunities or facing higher prices.

Consulting a Mortgage Broker or Financial Advisor

Mortgage brokers understand how different lenders assess HECS debt and can identify those with more favourable policies. Some lenders weight HECS debt less heavily in their calculations.

Brokers access multiple lender options and know which institutions suit borrowers with student debt. They can also time applications to coincide with policy changes or promotional rates.

A financial advisor helps create comprehensive debt reduction and savings strategies. They can model different scenarios to show whether early HECS repayment or deposit saving delivers better outcomes.

Professional guidance benefits:

• Access to specialist lenders
• Understanding of policy changes
• Personalised financial modelling
• Application timing advice

These professionals often identify strategies borrowers miss when planning independently. Their expertise becomes particularly valuable for complex financial situations involving multiple debts and savings goals.

Deciding Whether To Repay HECS Before Borrowing

Paying off HECS debt before applying for a home loan can boost borrowing capacity by removing mandatory repayments from income calculations. However, early repayment may not always be the smartest financial move, especially when considering opportunity costs and other debt priorities.

When Paying Off HECS Increases Borrowing Power

Banks calculate borrowing capacity by assessing disposable income after all mandatory payments. HECS repayments reduce this available income, which directly limits the loan amount lenders will approve.

Eliminating HECS debt removes these automatic deductions from salary calculations. This means borrowers keep more of their gross income, which translates to higher borrowing capacity.

The impact varies based on income levels and debt size. Someone earning $80,000 with $40,000 in HECS debt faces annual repayments of around $3,200. Removing this obligation could increase their mortgage capacity by $50,000 to $70,000.

Early repayment works best when:

• HECS debt is relatively small
• The borrower has sufficient savings remaining after repayment
• Property purchase is planned within 6-12 months
• Interest rates on other debts are manageable

Borrowers close to paying off their HECS naturally should consider clearing it before mortgage applications.

Potential Downsides of Early HECS Repayment

HECS remains one of the cheapest forms of debt available. It carries no interest charges, only indexation that matches inflation rates.

Using savings to clear HECS reduces available funds for home loan deposits. A larger deposit often secures better interest rates and avoids lenders mortgage insurance, potentially saving more money than the borrowing capacity increase.

Key risks include:

• Depleting emergency funds
• Missing out on investment opportunities that outpace indexation
• Reducing deposit size below 20% of property value
• Creating cash flow problems

The indexation rate in 2024 reached 4.8%, meaning HECS debt grew substantially. However, this still remains lower than most other lending rates.

Early repayment cannot be reversed if financial circumstances change unexpectedly.

Balancing Borrowing Capacity and Home Loan Affordability

Increasing borrowing capacity doesn’t guarantee mortgage affordability. Lenders assess both the maximum loan amount and the borrower’s ability to service repayments comfortably.

Someone might gain $60,000 in borrowing power by clearing HECS, but monthly mortgage repayments on the larger loan could strain their budget. The additional repayment burden may exceed the previous HECS repayment amount.

Smart borrowers should:

• Calculate total monthly costs including rates, insurance, and maintenance
• Consider interest rate rises over the loan term
• Maintain adequate savings for unexpected expenses
• Compare the cost of a larger mortgage against HECS indexation

Property prices and interest rates also influence this decision. In rising markets, increased borrowing capacity might secure a suitable property sooner.

However, borrowing the maximum amount available often creates financial stress.

The 2025 changes allowing some lenders to exclude HECS repayments from borrowing calculations may reduce the need for early repayment strategies.

Frequently Asked Questions

Lenders use specific criteria to evaluate borrowers with HECS-HELP debt, focusing on income thresholds and repayment obligations. The assessment process varies between institutions and requires particular documentation to verify debt details.

What factors are considered by lenders when assessing a loan applicant with an existing HECS-HELP debt?

Lenders examine the borrower’s income level to determine mandatory HECS repayment amounts. They calculate how much income remains after HECS deductions are made automatically through the tax system.

The debt balance and repayment timeline affect the assessment. Lenders consider whether the debt will be paid off within 12 months, as this may influence their serviceability calculations.

Employment stability and income growth potential are evaluated. Lenders assess whether the borrower’s income is likely to increase, which could trigger higher HECS repayments in future years.

How does a HECS-HELP debt impact the maximum amount I can borrow for a mortgage?

HECS repayments reduce available income for mortgage repayments. This typically decreases borrowing capacity by the amount of annual HECS repayments divided across monthly assessments.

The impact depends on income levels and debt size. Higher earners with larger HECS debts face more significant reductions in borrowing power than those with smaller obligations.

Some borrowers may see reductions of $10,000 to $90,000 in borrowing capacity. The exact amount varies based on individual circumstances and lender policies.

Can making additional repayments on my HECS-HELP debt improve my borrowing capacity for a home loan?

Additional repayments can reduce the debt balance faster than mandatory payments. This strategy may help borrowers reach the point where lenders ignore HECS in serviceability calculations.

Paying off HECS completely eliminates its impact on borrowing power. The freed-up income becomes available for mortgage repayments in lender calculations.

However, using savings for HECS repayments reduces available deposit funds. Borrowers need to weigh the benefits of increased borrowing power against lower deposit amounts.

Are there any differences in how various lenders treat HECS-HELP debt when calculating borrowing power?

Different lenders apply varying policies for HECS debt assessment. Some may ignore HECS repayments entirely for borrowers close to paying off their debt.

Major banks often have standardised approaches to HECS calculations. Smaller lenders or non-bank institutions may offer more flexible assessment methods.

Recent policy changes mean some lenders no longer count HECS repayments in borrowing calculations. This represents a significant shift from previous industry practices.

What evidence do lenders require regarding my HECS-HELP debt during the home loan application process?

Lenders typically request recent tax returns showing HECS repayment amounts. These documents demonstrate the actual repayments made in previous financial years.

A HECS debt statement from the Australian Taxation Office may be required. This shows the current debt balance and repayment history.

Pay slips indicating HECS deductions provide current repayment information. Some lenders may also request group certificates or payment summaries.

How is my HECS-HELP repayment income threshold factored into a lender’s assessment of my loan affordability?

Lenders consider the income threshold at which HECS repayments begin. They assess whether the borrower’s current income triggers mandatory repayments.

Future income increases that could push borrowers into higher repayment brackets are evaluated. This affects long-term loan affordability calculations.

The percentage-based repayment system means higher earners face proportionally larger deductions. Lenders factor these progressive rates into their serviceability models.