Does HECS-HELP debt affect your home loan borrowing power?

HECS-HELP loans have empowered many Australians to go to university and achieve higher-paying careers. But can taking on student debt hurt your chances when applying for a home loan? 

In short: absolutely. But there’s plenty you can do about it. So let's break down how student loan debt can impact your home buying journey.

The Higher Education Contribution Scheme and the Higher Education Loan Program (HECS-HELP, sometimes just shortened to HECS) is a government-backed lending scheme in Australia that loans eligible students money so they can attend university. 

Good news: HECS-HELP student loans in Australia are completely interest free.

However, your outstanding loan amount is indexed every 1 July for the End of the Financial Year (EOFY). This means the Australian Taxation Office adjusts the value of the debt based on the Consumer Price Index (CPI). This keeps the true value of the loan accurate over the years and in line with the overall cost of living.

Thanks to inflation, HECS-HELP debt was indexed by 7% in 2023.

In Australia, a lender considers any outstanding HECS-HELP debt as part of your home loan application. This is because HECS-HELP counts as a debt liability. Here's how it works. 

Whenever you apply to borrow money, like a home loan, a prospective lender will evaluate your debt liabilities, income, and credit history to see how much they can safely lend you. The amount they can safely lend you is called your borrowing power (or borrowing capacity). 

Any financial obligations you have, such as regular payments and debts, affect your ability to afford loan repayments because they take up part of your monthly income. Ideally, you want as few liabilities as possible to have better chances of home loan approval.

Liabilities can include expenses such as:

• Personal loans
• Car loans
• Credit cards
• Dependent children
• Higher education (student) debt. 

The lender determines your home loan serviceability by comparing your income against these debts. If they drain too much of your income, the lender will restrict the loan size you can get. This way, the lender only loans you how much you can afford, within their risk tolerance.

Given that HECS repayments are tiered based on income, this is most likely to affect young home buyers, low-income buyers, and first home buyers the most. 

HECS-HELP home loan borrowing power example

For example, let’s imagine a couple with a combined income of $100,000, no dependents and no credit cards, and only $3000 in monthly living expenses. They approach a bank for a loan with the following specifications:

• 6.00% p.a. variable interest rate.
• 25 year term.

If one partner earns $55,000 and has $30,000 owing on their HECS debt, they will be required to pay around $1,100 per year to the ATO. Since this is money that cannot go towards a monthly mortgage repayment, the lender will add the HECS debt to a list of the couple’s expenses.

With this HECS debt, the couple would only be able to borrow $592,450. Without it, however, their borrowing power goes up to $606,678 (an increase of almost $15,000). You can see this in action with Mozo's borrowing calculator.

So if someone’s debt reality is any more complicated than this (and for most people, it absolutely is), they’d likely have to look for more budget-friendly properties.

Other ways student debts impacts your home loan

Paying off a student loan can also slow down how quickly you can save for a home loan deposit, and a home loan deposit has a huge impact on home loan costs.

For example, your employer by law has to withhold extra money from your salary to cover mandatory repayment contributions you must make against your HECS-HELP debt. This gives you less disposable income to save for a home loan deposit, which in most Australian states is now six figures. 

You could speed things up by buying with a smaller home loan deposit, but this has cost implications, too. Small deposits mean high loan-to-value ratios (LVRs), and higher LVRs typically pay higher interest rates. 

When applying for a home loan, you should always declare your outstanding HECS-HELP debt. Your lender will want to consider all your assets, debts, and liabilities – including student debt – when assessing your home loan application. 

Keep in mind it’s important to be honest and upfront throughout the mortgage application process. This will not only protect you from negative consequences like losing out on your home loan, ending up on a ‘blacklist’, or being charged with fraud, but also safeguards your financial future.

If you genuinely cannot afford repayments on the home loan size you want, then it’s better to avoid that long-term stress and risk in the first place. Honesty truly is the best policy when it comes to home loans.

While it might not seem as urgent as other forms of debt, paying off HECS-HELP student loans is a great way to get proactive about your finances and prepare them for a home loan. After all, any debt you can pay off lessens your financial drag and makes it easier to afford mortgage repayments. 

Aside from asking for a higher wage from your employer or supplementing your income with freelance hours or side-gigs, there are a few things you can do to improve your borrowing capacity.

• Live within your means by cutting any unnecessary expenses. Banks will especially look at anything you’ve purchased in the three months prior to your application, so make sure your statements are lean, mean, and squeaky clean. Budgeting apps can help you track your living expenses. 
• Save for a bigger deposit, since that decreases your application’s loan-to-value ratio (LVR) and therefore lessens the perceived risk in the eyes of the bank. Consider setting an air-tight budget to get started.
• Consolidate all unnecessary debts, especially from credit cards. (We made a credit card debt calculator to help you).
• Look at cheaper properties. It can suck to compromise a little on your dream home, but as they say: a bird in the hand. 
• Use government grants. Depending on your circumstances, you may be eligible for one or more federal schemes to assist first home buyers. In particular, the First Home Owner Grant offers eligible borrowers a one-off lump sum, which varies in size depending on which state or territory you live in. This way, the government covers your shortfall and you’re able to get a crucial foot in the door – even with HECS debt.

Ready to buy your dream home? We’ve compiled a selection of low rate home loans on offer below.