Megan Brooks
When applying for a loan, banks will consider your HECS debt as part of your overall debt, which includes credit cards and other loans. This debt will impact your borrowing power and how much you can loan. Lenders will look at your income to determine how much you can pay back, which will affect your home loan. While HECS debt does not accrue interest, it is indexed to keep up with the cost of living. From June 2025, the government will automatically cut HELP debt balances by 20%, and the Australian Prudential Regulation Authority (APRA) will introduce new guidance on how lenders assess HECS-HELP debt.
| Characteristics | Values |
|---|---|
| Interest charged | No |
| Indexed | Yes |
| Indexation rate in 2023 | 3.2% |
| Indexation rate in 2024 | 4.0% |
| Lenders' consideration | Yes |
| Lenders' calculation | Based on the repayment amount, not the debt size |
| Lenders' calculation example | If the repayment amount is $5000 per year, the maximum borrowing capacity reduces by $50,000 |
| Lenders' calculation type | Deducting the repayment amount from the gross income |
| Lenders' calculation type example | For someone earning $51,957 a year, the HELP debt is considered as a 2% liability; for someone earning $107,214 and above, the HELP debt is considered as an 8% liability |
| Lenders' calculation type type example 2 | The higher the income, the higher the repayment rate |
| Lenders' calculation type type example 3 | The repayment amount is determined by the income bracket |
| Lenders' calculation type type example 4 | If the debt is likely to be repaid within 12 months, lenders can choose to exclude the debt |
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What You'll Learn
How HECS-HELP debt impacts borrowing power
HECS-HELP debts are interest-free, but they are indexed annually on 1 June to keep up with the rising cost of living. This means that the amount is adjusted according to the inflation rate. As a result, your HECS-HELP debt will increase over time.
When applying for a home loan, lenders will consider your HECS-HELP debt as part of their assessment. They will look at the repayment rate, which is based on your income, and treat it as an expense or liability. This will impact how much you can borrow, potentially reducing your borrowing capacity or power.
The impact of HECS-HELP debt on your borrowing power depends on your income and repayment rate. For example, an individual with a HELP debt of $15,000 and an income of $105,000 per year may have their borrowing capacity reduced by approximately $70,000. However, this varies depending on the lender and their policies. Some lenders may exclude HECS-HELP debt from their calculations if it will be repaid within a certain period, such as within 12 months or 2 years.
It is important to note that lenders typically focus on the current repayment rate rather than the total debt amount. Seeking advice from a mortgage broker or home loan expert can help you understand how your HECS-HELP debt may affect your specific situation and borrowing power.
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Whether banks consider it a liability
Whether banks consider HECS debt a liability depends on the individual circumstances of the borrower. HECS-HELP debt is interest-free, but the amount is adjusted annually in accordance with an inflation factor. When applying for a home loan, banks and mortgage brokers will consider the borrower's gross income, expenses, and liabilities, including any HECS debt. This debt is treated as a recurring liability and reduces the borrower's overall borrowing capacity. The impact of HECS debt on borrowing capacity can be significant, with some individuals experiencing a reduction in their borrowing capacity by up to $70,000. However, it is important to note that the impact of HECS debt on an individual's borrowing capacity depends on their income and repayment rates. The higher the income, the higher the repayment rate, which can result in a more substantial impact on borrowing capacity.
In recent years, there has been a shift towards stricter lending standards and increased paperwork checks for borrowers. As a result, experts predict that HECS debt could become a more significant barrier when applying for a home loan in the future. This is because lenders will consider how the HECS debt affects the borrower's ability to afford the loan. However, it is worth noting that HECS debt is not the sole deciding factor in loan approvals. Other factors, such as income, credit history, and other debts, also play a crucial role in the lender's decision-making process.
While paying off HECS debt before applying for a mortgage may be beneficial, it is not always necessary. Some lenders, such as Commonwealth Bank (CBA), have introduced policies that allow them to ignore HECS debt if it is likely to be repaid within a specific timeframe, typically within 12 to 24 months. These policies aim to provide flexibility and recognize that HECS debt should not be a long-term liability that hinders an individual's ability to obtain a home loan.
It is important to note that the treatment of HECS debt by lenders may vary, and it is always advisable to seek expert advice before making financial decisions. Borrowers should carefully consider their financial situation, including their income, expenses, and other debts, to make informed choices regarding their HECS debt and home loan applications.
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How it affects your income
HECS-HELP debt can impact your income and borrowing power in several ways. Firstly, lenders will consider your HECS-HELP debt when assessing your loan applications, including home loans and mortgages. This debt is viewed as a liability or expense that reduces your borrowing capacity. The impact on your borrowing capacity can be significant, as lenders will look at the repayment amount coming out of your income, rather than the size of the debt itself. For example, an individual with a HECS-HELP debt may be able to borrow $430,000 for a home loan, while the same individual without this debt could borrow $480,000, a difference of $50,000.
Secondly, the amount you repay towards your HECS-HELP debt is directly linked to your income. As your income increases, your repayment rate also increases. This is because HECS-HELP debt is tailored to your income bracket, and repayments are typically a percentage of your income. Therefore, the more you earn, the higher your repayment amount will be.
Thirdly, HECS-HELP debt can impact your income tax calculations. Any repayments made towards your HECS-HELP debt may be tax-deductible, which can affect your overall tax liability and, consequently, your net income. Additionally, your employer may withhold a percentage of your income to go towards your HECS-HELP debt, further impacting your take-home pay.
It is important to note that the treatment of HECS-HELP debt by lenders is evolving. Previously, lenders considered it an ongoing financial liability. However, under updated guidance, some lenders can now ignore HECS-HELP debt if it is likely to be repaid within a specified period, such as one or two years. This change can significantly improve an individual's borrowing capacity.
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How to check your balance
When applying for a loan, banks will consider your HECS debt as part of your overall financial situation. They will look at the amount of HECS repayment that is being deducted from your income, rather than the size of the debt itself. This is because the amount you pay back is tailored to your income bracket and adjusts as your career progresses.
To check your HECS balance, you can access information regarding your Higher Education Loan Program (HELP) debt at any time through the Australian Taxation Office (ATO) online or telephone services. You can set up a myGov account and link it to the ATO online services by following the instructions on the ATO website. You can also contact the ATO myGov Helpdesk on 13 23 07 and select option 1 for assistance. Your HELP debt will provide an itemised breakdown of your HELP loan received, indexation applied, and any compulsory or voluntary repayments you have made.
If you have notified your employer about your HELP debt and they are withholding an amount from your wage each pay cycle (also known as a PAYG deduction), it is important to note that these amounts are not credited against your HELP debt immediately. When you do your tax return, the ATO will calculate the compulsory repayment you owe and use the withheld amounts to cover this repayment. After the census date, your higher education provider must send you a Commonwealth Assistance Notice (CAN) listing the units of study you enrolled in where you accessed a HELP loan. You can check the amounts listed on your CAN with the amount that has been added to your HELP debt to ensure you have been charged correctly.
You can also log into the myHELPBalance portal to access your 'HELP loan history' and ensure your provider has correctly reported your recent units of study once the census date has passed. Please note that your current fee period's HELP debt may not be included in your total accumulated HELP debt balance until up to six months after the census date for that period.
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The impact of indexation
Indexation is when a HECS-HELP debt is adjusted to reflect changes in the cost of living. This is to ensure that the debt maintains its 'real' value over time and does not lose value relative to other goods and services. The Australian Taxation Office (ATO) applies indexation to HELP debts annually on 1 June. Indexation is only applied to HELP debts older than 11 months and is based on the lower of the Consumer Price Index (CPI) or Wage Price Index (WPI).
However, it is important to note that the impact of indexation on an individual's financial situation depends on their circumstances. For example, if an individual's income is below the repayment threshold, they may not be required to make any repayments, and indexation may not have a significant impact. Additionally, HECS-HELP debt does not impact an individual's credit rating or ability to obtain credit, other than in relation to available income for loan repayments.
To minimise the long-term impact of indexation, graduates can make additional voluntary repayments when possible. The Government's HECS indexation credit estimator can be used to understand how much these extra payments can reduce the debt. Seeking independent financial and tax advice can also help individuals understand the impact of indexation on their financial position and make informed decisions about debt repayment and investment.
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Frequently asked questions
Yes, banks do look at your HECS debt when assessing your loan application. Lenders will consider your HECS repayment amount as an expense and treat it like a recurring liability.
HECS debt can reduce your borrowing capacity. Lenders will look at the HECS repayment amount coming out of your income and treat it as an expense. This will affect your net income, which is what lenders use to calculate how much you can afford to borrow.
Yes, it is possible to get a home loan with HECS debt. However, the size of your HECS debt may impact the amount you can borrow. Lenders will consider your HECS debt as part of your overall debt and financial liabilities when assessing your loan application.
