How lenders view HECS debt vs other debt
HECS-HELP (Higher Education Contribution Scheme – Higher Education Loan Program) debt is different from regular debt in a few key ways:
HECS debt
- It has no interest – only inflation-based indexation.
- Repayments are automatically withheld from your income when you pass the threshold.
- You don’t control the repayment amount – it’s set by your income level.
Debt from credit cards and personal loans
- You are typically charged interest.
- They require you to make minimum repayments yourself.
- These debts are seen as riskier liabilities.
Because of these differences, banks may view HECS as lower-risk debt. However, when you apply for a home loan, you’ll need to disclose all your financial details, including your HECS-HELP debt. Lenders will review this information to determine if the home loan suits your situation.
How HECS debt impacts your borrowing power
Even though HECS isn’t a traditional loan with monthly bills, the compulsory repayments reduce your usable income, lowering your borrowing power.
For example:
- Let’s say you’re earning $85,000 and pay around 5.5% of that towards your HECS debt.
- This means your repayments work out to $4,675/year ($390 per month) that your lender will see as unavailable for a mortgage.
Let’s dive deeper to understand how this works.
Having HECS debt (like any other debt) will increase your debt-to-income ratio, which is calculated by dividing your debts and liabilities by your gross income. This is a critical calculation among others, because it helps lenders determine your ability to afford home loan repayments (serviceability), which in turn impacts your borrowing power.
A high debt-to-income ratio (6 or higher) means you’re using a large portion of your income to repay existing debt, limiting your ability to service a new loan. This can make you subject to stricter lending conditions or smaller loan amounts. A low debt-to-income ratio, on the other hand, is ideal because it means you have enough income to service new debt. If you have a higher borrowing power, you’re much more likely to get a higher home loan amount approved.
Exceptions for exclusion
Lenders may ignore your HECS repayments in home loan serviceability tests if you’re close to paying off your debt, for instance, within 12 months. Read about Australian Prudential Regulation Authority’s (APRA) guidance on how lenders treat HELP debt repayments when assessing home loan applications.
How to maximise your borrowing power
Log into your myGov account to see how much you’ve got left on your HECS before reaching out to a lender. Here are tips on what you need to do before applying for a home loan with a HECS debt.
Should you pay off your HECS debt before applying for a mortgage?
There’s no universal answer. It depends on your individual circumstances.
Reasons to pay off
- You're applying for a home loan close to your maximum borrowing capacity and removing your HECS repayment could push you over the line.
- You have plenty of spare cash after your deposit.
- Your remaining HECS debt is small, but your income is high – so a large repayment is being deducted each year.
- You want fewer repayments to manage, making it easier to budget for your home loan.
Reasons to keep it
- Paying off HECS would likely lower your deposit or leave you with less upfront costs like stamp duty.
- Your HECS repayments are relatively low and doesn’t significantly reduce your borrowing power.
- You have higher interest debts like a credit card or car loan that should be cleared first.
- Your HECS debt is large and won’t be cleared soon.
Ultimately, it’s about finding the balance between clearing debt and keeping enough cash for your house deposit and other costs. The best move is often to run your numbers, plan your deposit carefully, and get expert advice. That way you’ll know if paying off your HECS now actually improves your chances or whether your money is better spent on your future home.
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