When planning your first home purchase, it’s natural to weigh every financial decision carefully. One of the most common dilemmas Australians face is whether they should pay off their HECS debt or HELP debt before submitting a home loan application.

Although these education loans are considered low-risk debts, they can still influence how much a bank is willing to lend you. Understanding how they affect your financial profile is crucial to making an informed decision that supports your property goals.

To help you make the right choice, this blog will share the relationship between HECS and HELP debt and how it impacts borrowing power.  

Understanding HECS and HELP Debts in Australia

The Higher Education Contribution Scheme (HECS) and Higher Education Loan Program (HELP) are designed to make tertiary education more accessible. Instead of paying your tuition fees upfront, you can borrow from the government and repay it once your income surpasses a set threshold ($54,435 for 2024-25).

While HECS and HELP debt are interest-free, they are indexed annually to inflation, meaning your debt can grow if unpaid. However, repayments are automatically deducted through your tax return at a rate linked to your income level, starting at 1% and rising to 10%.

Even though lenders view these debts more favourably than personal loans or credit cards, they still consider the impact on your home loan application. Ultimately, it’s another outgoing commitment that reduces your available income.

How HECS and HELP Debts Impact Your Home Loan Application

When assessing a home loan application, banks and lenders use strict serviceability models to ensure you can afford your repayments. Here’s how a HECS debt or HELP debt plays into this calculation:

• Debt-to-Income Ratio: Lenders assess your total obligations versus your income. Compulsory HECS/HELP repayments lower the income available for mortgage servicing.
• Reduced Borrowing Capacity: Even a small repayment percentage (2–5% of income) can trim thousands off the maximum loan amount a lender is willing to offer.
• Stress Testing: Lenders model your financial situation under higher interest rates. A HECS repayment can make a larger impact you look under these scenarios.
  

Should You Pay Off HECS or HELP Debt Before Applying for a Home Loan?

The decision to clear your HECS debt or HELP debt before applying for a mortgage depends mainly on your circumstances and financial goals.

Here’s a more detailed breakdown:

You Might Consider Paying Off HECS/HELP Debt If:

• You Are Close to Paying It Off:
  If your outstanding balance is minimal (e.g., less than $10,000), eliminating it could boost your borrowing power without sacrificing too much savings.
• You Need Maximum Borrowing Power:
  A slightly higher borrowing limit could help you secure your ideal home or a better location in a competitive property market.
• Your Income Is on the Threshold:
  Clearing the debt might make sense if you’re just above the repayment income threshold and repayments significantly reduce your borrowing capacity.
• You Have Strong Savings Beyond Your Deposit:
  If you’ve built up an emergency fund and a sufficient deposit, using surplus funds to wipe out your HECS debt or HELP debt could be a smart financial move.
  

You Might Keep Your HECS/HELP Debt If:

• You Need to Prioritise Your Deposit:
  The size of your deposit significantly impacts your LVR (Loan-to-Value Ratio). A larger deposit could mean lower interest rates and less chance of paying Lenders Mortgage Insurance (LMI).
• Your Debt Size Is Still Substantial:
  If you owe a significant amount, paying it off could unnecessarily drain your cash reserves and delay your homeownership plans.
• Your Repayment Rate Is Manageable:
  If your compulsory repayments are small relative to your income, it might not significantly impact your loan approval.
• You’re Taking Advantage of First Home Buyer Schemes:
  Government incentives like the First Home Guarantee or stamp duty concessions could outweigh the benefits of clearing student debt first.
  

Conclusion

Paying off your HECS debt or HELP debt before applying for a home loan is a personal decision that requires balancing your cash flow, savings goals, and property ambitions. For many Australians, prioritising a larger deposit and money management may deliver better results than simply wiping out student debt. However, in certain situations—especially when your borrowing power is marginal—clearing your education debt could be the advantage you need.

At LiveInvest Finance Solution, we help Australians make strategic financial choices that align with their property goals. Whether you’re grappling with HECS or HELP debt, building your deposit, or preparing for a home loan application, our expert team guides you every step. 

Ready to make your property dreams a reality? Talk to LiveInvest Finance Solution today and learn how to maximise your borrowing potential!