Many aspiring homeowners get a rude shock when they find their borrowing power has dropped by $50,000 because of HECS debt. HECS can really cut into your borrowing power.

This issue touches millions of Australians. According to the ATO, the country has more than three million people with HECS university debts or similar government-supported study loans. The average loan stands at about $27,640. HECS debt affects borrowing power. Lenders look at Net Disposable Income (NDI) to decide loan amounts, and HECS repayments reduce this figure.

This piece looks at how HECS debt affects borrowing capacity, upcoming changes, and ways to boost borrowing potential while managing student debt.

Understanding HECS and How It Works

HECS-HELP affects the borrowing power of millions of Australians. Let's understand how this system works before we look at its effect on loan applications.

What is HECS-HELP debt?

The Australian Government's HECS-HELP loan program helps eligible students pay their university fees. Students can put off paying their education costs until they earn enough money. This makes higher education available by removing the need to pay upfront. The program welcomes Australian citizens, permanent humanitarian visa holders, and some New Zealand citizens who study in Commonwealth Supported Places.

How repayments are calculated

You start paying back your HECS-HELP debt through the tax system once you earn above the minimum threshold. The repayment rates go up as you earn more, starting at 1% just above the threshold and reaching 10% for bigger incomes, according to the ATO. Your repayment income adds up your taxable income, net investment losses, reportable fringe benefits, and reportable super contributions.

Why income matters more than debt size

HECS-HELP differs from regular loans because your income, not your debt size, decides your repayments. Two graduates who earn the same will pay the same amount, even if one owes much more than the other. The debt doesn't grow with interest like normal loans do. The total amount just gets adjusted yearly to match living costs. This happens every June 1.

Lenders care more about how HECS repayments cut into your take-home pay than your total debt. This makes a big difference in understanding how HECS affects your borrowing power and how lenders look at loan applications from graduates with student debt.

How HECS Debt Affects Your Borrowing Power

Lenders use a specific method to assess HECS debt that affects your home loan eligibility and borrowing capacity.

How lenders calculate borrowing power

Financial institutions look at your overall financial position to determine how much you can borrow. This includes your income, expenses, and existing debts. The debt-to-income (DTI) ratio comes from dividing your total debts and liabilities by your gross income. Lenders use this ratio to understand your full debt exposure and to know how to make mortgage repayments without financial strain. Your borrowing power increases with a lower DTI ratio, which shows you have enough income to handle your debts.

Impact of HECS on net disposable income

HECS debt substantially affects your Net Disposable Income (NDI), which is the foundation of lenders' borrowing capacity calculations. The NDI formula typically works like this: [(Taxable Income - Tax Payable Including Medicare Levy) + Non-Taxable Income] - Outgoings = NDI. Your take-home pay and NDI decrease because HECS repayments come directly from your salary. Your maximum borrowing power might drop by about 10 times the value of your annual HECS repayments.

Why HECS is treated like other liabilities

Lenders treat HECS debt as with other financial obligations, like personal loans and credit cards. This happens because you must make HECS repayments once you hit the income threshold. These unavoidable payments reduce the income available to cover mortgage repayments. Someone earning $107,029 annually pays 3% of their income toward HECS, which adds up to $3,210 per year.

Our team at Synergy Mortgage Brokers can help you understand how HECS debt affects your borrowing power. Feel free to reach out to us.

APRA believes HECS repayments should be part of serviceability assessments because these payments come from gross income and can't go toward mortgage payments. HECS repayments stand apart from other debt obligations since they depend on income rather than debt size or interest rates.

What’s Changing in 2025 and Who Benefits

The most important changes to HECS debt assessment will affect Australian borrowers soon. New policies coming in 2025 will change how lenders review HECS debt for home loan eligibility. This could boost borrowing power for university graduates throughout the country.

New rules for HECS in borrowing assessments

APRA has finalised changes in terms of how authorised deposit-taking institutions (ADIs) assess HECS and HELP debt repayments when it comes to applying for a home loan.

ADIs will get more flexibility to factor HECS debt into borrowing capacity calculations by the September 2025 quarter. Revised guidelines now recognise that HECS debt differs from traditional loans. The Australian government believes HECS repayments deserve special treatment in mortgage assessments because they depend on income.

Lenders must currently include HECS repayments as ongoing liabilities that reduce disposable income. However, the changes being made see lenders paying more attention to HECS repayments cut into your take-home pay rather than your total debt.

When lenders may ignore HECS repayments

Lenders might disregard HECS repayments in certain cases when calculating borrowing capacity. This would most likely occur when debt is expected to be paid out within the next 12 months.

Who gains the most from these changes?

University graduates buying their first home may benefit greatly from these reforms. The changes will help graduates in healthcare, engineering, law, and finance who earn higher starting salaries but carry substantial HECS debts.

Young professionals starting their careers with HECS debt and competitive salaries may find homes more available to them. Couples who both have HECS obligations might see their combined borrowing power increase substantially once these changes take effect.

In spite of that, these benefits depend on individual lenders adopting the new assessment options. Some financial institutions might stick to more conservative approaches, while others will welcome the changes to attract graduate borrowers in today's competitive mortgage market.

Steps to Improve Your Borrowing Power with HECS

Graduates can take specific actions to maximise their borrowing power despite having HECS debt if they plan properly. Your financial situation becomes clearer when you understand where you stand.

Check your HECS balance and income bracket

You need to know your exact HECS balance to determine your position. Your myGov account linked to the ATO shows your current loan balance. The immediate figures display all loan amounts, indexation, and any repayments made. The balance appears under "Tax," then "Accounts," followed by "Loan accounts" once you've linked your account.

Your repayment bracket plays an equally crucial role. The system calculates repayments based on income rather than loan size, which means your income threshold clarifies your annual payment requirements.

Talk to a HECS-friendly lender or broker

Lenders view HECS debt differently, especially with upcoming rule changes. So, talking to a mortgage broker who knows how various lenders handle HECS debt is a great way to get insights.

Our team at Synergy Mortgage Brokers can help you learn about how HECS debt affects your borrowing power.

Some lenders might assess your application more favourably, especially when you have strong income growth potential in your profession. Credit unions, building societies, and non-bank lenders often use tailored assessment models that could work better for graduates.

Decide whether to pay off HECS or save for a deposit

Many graduates face the choice between paying down HECS debt or saving for a deposit. Financial experts often suggest focusing on your home deposit since HECS has no interest (only indexation). Voluntary HECS repayments might benefit those who plan to buy in several years.

Paying off smaller HECS balances completely could increase your borrowing capacity. But you should think about whether using savings for HECS might reduce your deposit and trigger Lenders Mortgage Insurance costs.

Use tools to estimate your borrowing power

Online calculators help you understand your potential borrowing capacity. On the Synergy Mortgage Brokers website, we provide borrowing power calculators that look at your income, expenses, and debts on our website. These tools calculate borrowing power by subtracting expenses from your net income.

Your calculator results become more accurate when you include all financial details, including HECS repayments. Note that calculators serve as guides rather than guarantees and don't show your complete financial position.

Conclusion

HECS debt is one of the most important factors that affects how much millions of Australians with university loans can borrow. Lenders look at your net disposable income to calculate your borrowing power. This calculation can cut your borrowing capacity dramatically. Many graduates find that this reality changes their plans to buy a home.

The good news is that change is coming. The 2025 reforms could help people with HECS debt. Banks might not need to count HECS payments in some cases, which could boost what qualified applicants can borrow. This is great news for first-time homebuyers who earn well, even with their student debt.

You need to take action now, whatever changes are coming. Check your HECS balance on myGov to know where you stand. Your borrowing options improve when you find banks that get how HECS debt works. Your timeline and money situation will help you decide whether to pay off your HECS or save for a deposit.

Knowing how HECS affects your situation gives you the power to make better money choices. Student debt makes borrowing tough right now, but smart planning and knowing about future changes help graduates direct their path through the property market. Getting a home might need more thought if you have student debt, but good money management makes it possible.

Our team at Synergy Mortgage Brokers can help you learn about how HECS debt affects your borrowing power. Please don’t hesitate to contact us for further advice!

Key Takeaways

Understanding how HECS debt impacts your borrowing power is crucial for Australian graduates planning to buy property. Here are the essential insights to help you navigate home loan applications with student debt:

• HECS debt reduces borrowing power dramatically.

• 2025 rule changes may allow lenders to ignore HECS repayments under the circumstance that the debt will be paid off within 12 months, potentially increasing borrowing capacity for qualified applicants with strong financial profiles.

• Income matters more than debt size for HECS repayments - two graduates with different debt amounts but identical incomes make the same repayment. 

• Check your exact HECS balance via myGov and speak with HECS-friendly brokers to understand your position and find lenders who offer more favourable assessments for graduates.

The key is understanding your specific situation and taking proactive steps to maximise your borrowing potential. While HECS debt presents challenges, strategic planning and awareness of upcoming reforms can help graduates achieve homeownership goals more effectively.

FAQs

Q1. How does HECS debt impact borrowing power for a home loan?

HECS debt typically reduces borrowing power for a home loan. However, APRA suggests that lenders may disregard HECS repayments when debt is expected to be paid out within the next 12 months.

Q2. How can I check my current HECS debt balance?

You can check your HECS debt balance by logging into your myGov account and linking it to the ATO. Once linked, go to "Tax," then "Accounts," and finally "Loan accounts" to view your current balance.

Q3. Are there lenders who are more favourable to borrowers with HECS debt?

Yes, some lenders may offer more favourable assessments for borrowers with HECS debt, particularly for those in professions with strong income growth potential. It's advisable to speak with a mortgage broker who understands how different lenders treat HECS debt to find the best options for your situation.