How HECS-HELP Debt Affects Your Home Loan

HECS-HELP debt is one of the most common financial obligations for younger Australian borrowers — and one of the most misunderstood in the context of home loans. It does affect your borrowing capacity, but not in the way many people expect.

How HECS-HELP Repayments Work

Unlike a standard loan, HECS-HELP has no monthly repayment and no interest (though it is indexed annually to CPI). Repayments are compulsory and collected through the tax system once your income exceeds a threshold. On 1 July 2025 the system was overhauled — the old 18-bracket rate-on-total-income approach was scrapped and replaced with a 3-band marginal system that applies the rate only to income above the threshold:

The marginal system is materially better for most earners. Worked example — $80,000 income: Nil on the first $67,000, then 15% × $13,000 = $1,950/year (about $163/month). Under the old system this would have been 4% of the full $80,000 = $3,200/year — so most borrowers in the $67k–$125k band now repay $1,000–$1,500 less per year.

How Lenders Assess HECS Debt

Lenders do not treat your HECS debt balance as a traditional loan. They cannot see the total balance on most standard credit checks. However, they do ask you to disclose it, and they assess the compulsory repayment amount as a recurring obligation that reduces your disposable income.

The compulsory annual repayment at your income level is divided by 12 and treated as a monthly expense. This directly reduces your assessed borrowing capacity. At $90,000 income, the compulsory HECS repayment under the new marginal system is approximately $3,450/year ($287/month) — that's 15% × ($90,000 − $67,000). This single line item typically reduces borrowing capacity by approximately $55,000–$70,000 depending on the assessment rate used (less than under the old system, which would have produced ~$4,950/year of compulsory repayment at the same income).

Should You Pay Off HECS Before Buying?

This depends on comparing the HECS indexation rate against your mortgage rate. HECS-HELP is indexed to the lower of CPI or WPI each year on 1 June (formula changed in 2025). The 2024 indexation rate was 4.7%; the 2025 rate was 4.0%. A typical variable mortgage rate is currently 6.25–7.25%.

In most rate environments, mortgage debt costs more than HECS debt, making it financially better to keep the HECS debt (cheaper debt) and use your savings toward a larger home deposit (which reduces LMI or avoids it entirely). The exception is if the indexation rate is high and you are close to paying off the HECS balance entirely — at which point a full payoff removes the compulsory repayment obligation and improves borrowing capacity.

HECS vs Mortgage Rate Comparison

At the current RBA cash rate of 4.35% (effective 6 May 2026), a variable mortgage rate of approximately 6.25–7.25% substantially exceeds recent HECS indexation rates of 3–5%. This means every dollar used to voluntarily pay down HECS debt is "earning" a 3–5% effective return, while the same dollar used as additional mortgage deposit (reducing an LMI premium or reducing the mortgage balance) earns a 6.25–7.25% effective return. The mortgage paydown is almost always the better financial use of a surplus dollar.

Practical Steps if HECS Is Limiting Your Borrowing

• Make a voluntary lump-sum HECS payment if you are close to paying off the remaining balance entirely — removing the obligation fully is the cleanest outcome
• If the balance is large, focus on building a larger deposit rather than partial HECS reduction
• Check your ATO MyGov account to confirm your exact HECS balance before applying — some lenders will want this figure
• Apply to lenders that are more generous in their HECS assessment methodology (a broker can identify these)

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