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  • Writer's pictureColin Green

How Much Does HECS Affect Borrowing Power?

There is a lot of coverage in the news at the moment about Government support for those with HECS student loans as indexation is about to once again be applied and many are struggling with cost of living pressures. However, one of the questions that we frequently get asked is about how much HECS can affect your borrowing power and in particular, the impact on home loan applications. HECS-HELP loans are a stepping stone to a future career and improved earning potential for many Australian young people. So does HECS debt affect borrowing power longer term and if so, by how much? Let’s take a look.

young person looking at hecs debt and borrowing power calculations

What Is HECS-HELP And How Is It Different To Other Types Of Debt?

HECS-HELP is a loan program for eligible students in Australia that helps them to cover the cost of their tertiary education fees. HECS stands for Higher Education Contribution Scheme, and the HELP stands for Higher Education Loan Program. This program is unique and differs from other types of debt in several key ways:

  1. Government-Linked: HECS-HELP is provided by the Australian Government, making it a public debt rather than a private one like those incurred through credit cards or personal loans.

  2. Interest-Free: one of the biggest differences is that HECS-HELP loans are interest-free (yes - really!) but they are indexed each year according to whichever is lower of the Consumer Price Index (CPI) or Wage Price Index (WPI) to maintain their real value in line with inflation.

  3. Income-Contingent Repayments: Unlike standard loans, repayments for HECS-HELP start only when your income reaches a certain threshold and increases on a tiered schedule in line with your income bracket. If you take time off work or lose your job repayments are typically paused. This makes the repayment system more flexible and linked to the borrower's ability to pay.

  4. Directly Deducted from Wages: Once borrowers are earning above the repayment threshold, their repayments are typically deducted from their wages through the tax system, similar to income tax, which simplifies the repayment process.

  5. No Time Limit on Repayment: There is no set time frame within which you have to repay a HECS-HELP debt. The debt remains until it is fully repaid, regardless of how long it takes.

These features make HECS-HELP a more flexible and potentially less stressful form of debt compared to traditional loans, where interest accumulates and repayments are not necessarily tied to your financial situation. However, HECS is still considered by lenders to be a debt liability that will be factored into your Debt to Income ratio (DTI). So how much does this impact your borrowing power?

How Much Does HECS Affect Borrowing Power?

The thing to remember is that for a lender it’s all about what level of ‘risk’ you pose when they consider lending you money and how likely you are to keep up with your repayments. They assess this by running a serviceability test to review your level of income, credit history and your current debts and liabilities to calculate your Debt to Income ratio. Your debts will include everything from personal loans, car loans, credit cards and even dependent children.

As HECS is still considered by lenders to be a debt, it will of course be included in this calculation.

  1. Debt-to-Income Ratio: Lenders look at your debt-to-income ratio to assess your ability to repay a loan. HECS-HELP debt is considered a long-term financial commitment and is factored into this ratio. Even though HECS-HELP repayments are income-contingent (you only start repaying when your income reaches a certain threshold), they still reduce your take-home pay, which in turn may affect how much lenders think you can afford to borrow.

  2. Repayment Obligations: The amount you have to repay each year increases with your income. These repayments can impact your borrowing power similar to any other debt obligation. For example, if you're required to repay 4% of your income towards your HECS-HELP debt, that's 4% less income available to service a new loan.

  3. Credit Assessment: Although HECS-HELP is not reported directly as a 'debt' on your credit report like a personal loan or credit card debt would be, lenders still consider it in their assessment of your financial commitments when you disclose it on your loan application.

  4. Disposable Income: Lenders use models to estimate your living expenses and then determine how much income you have left to service loans. Higher HECS-HELP repayments reduce your disposable income, which can lower the amount a lender might be willing to extend to you.

So while a HECS-HELP debt might not impact your credit score directly, it does reduce your disposable income and affects your debt-to-income ratio, thereby influencing how much you can borrow from lenders. It's important to consider these factors when applying for a mortgage or other types of loans. A finance broker can help you with the key calculations before you start the process and explain the types of products available to you.

Does HECS Affect Home Loan Applications?

The simple answer to this question is yes, it can affect your borrowing power… BUT it's not usually a major impediment to getting a home loan. A lot of first time buyers still have a HECS debt when entering the property market.

Here are the primary ways it can impact the application process:

  1. Reduction in Borrowing Capacity: Lenders consider HECS debts when assessing your financial obligations. This debt is treated similarly to other types of loans, such as a car loan or personal loan, which means it can reduce the amount you are able to borrow. Essentially, the higher your HECS debt, the more it could potentially reduce your borrowing capacity.

  2. Impact on Serviceability: When lenders assess your ability to service a loan, they look at your income and all your liabilities, including your HECS debt. The repayments for HECS are income-contingent, which means they increase as your income increases. This is factored into your serviceability calculations, affecting how much the lender thinks you can afford to repay.

  3. Part of Credit Assessment: While HECS debt does not appear on your credit file, lenders ask about it in the loan application process, and it forms part of their overall assessment of your financial health.

Do I Need To Pay Off HECS Before Applying For A Mortgage?

The reality is you can still get a home loan even if you haven’t paid off your HECS debt. Lenders won’t necessarily look at how much you have left to pay on your HECS but will take into consideration what your HECS repayments currently are.

One of the key considerations here is your home loan deposit. The larger the deposit you are able to save, the better your Loan to Value ratio (LVR) will be meaning you present a lower risk in the eyes of the banks or lenders and you can potentially avoid Lenders Mortgage Insurance (LMI).

Obviously your HECS debt may impact your ability to save a decent deposit. So if, for example, you already have a healthy deposit and only have a small amount of HECS debt it may be worth trying to pay this off before applying for a mortgage to boost your borrowing power. And if your borrowing power is where you need it to be but you need a healthier deposit you may choose to not pay off any extra on your HECS debt and focus on building your deposit.

It’s worth remembering that there are other things that may have more of a positive influence on your borrowing capacity including lowering your cumulative credit card limits, limiting your use of Buy Now Pay Later (BNPL) accounts like Afterpay, Zip and Klarna and paying off other loans (as covered in our blog about the surprising reasons home loan applications may be rejected).

The good news is that HECS debt is considered less negatively than other kinds of debt because it is interest-free (though indexed to inflation each year) and paid back only when your income reaches a certain threshold. If you're planning to apply for a home loan and have a HECS debt, it's a good idea to discuss this with an expert home loan broker to get tailored advice on the products and terms that would suit you best, including any grants, concessions and ‘Help To Buy’ schemes that you may be entitled to take advantage of.

If you are looking to buy or build your first home, the experienced home loan experts from CJG Finance can help you navigate the process.

To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him:


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