Will HECS reduce my borrowing power?

HECS-HELP is the Higher Education Contribution Scheme (HECS) and Higher Education Loan Program (HELP). It enables students to borrow money to undertake higher education, like university.

For many people with a HECS debt, the debt is seen as a “set and forget” option. This is because if you’re earning above the threshold to pay back the loan, then your employer will withhold the required amount from your pay cycle, which will be used by the ATO to pay back the loan. So for many people a HECS debt becomes something they rarely think about, until they apply for a loan.

How does HECS impact my borrowing power?

Unlike most loans, HECS is interest free. However, HECS is indexed. This means it is adjusted in line with the consumer price index. For 2024, it was indexed at 4.7%, meaning that a $50,000 HECS debt would have an additional $2,350 to pay.

On top of this, HECS will impact how much you can borrow. Your borrowing power is an estimation of the maximum you can pay back with your financial situation. As HECS is a debt, it will factor into your borrowing power calculations.

This doesn’t mean you should rush to pay back your HECS though.

Should I pay back my HECS early to increase my borrowing power?

Let’s look at a scenario. You have a HECS debt of $50,000 and are looking to purchase a new property. You have $250,000 to spend on a deposit and your borrowing power calculator says you can borrow $500,000 when you include that you have a HECS debt. If you take out the HECS debt, your borrowing power jumps to $575,000. This might have you jumping to pay off your HECS, but let’s look at how much you can save by paying that extra $50,000 up front.

If you find a $700,000 property with your $250,000 deposit, over thirty years your $450,000 loan will cost you an additional $610,439 in interest at NAB’s current suggested variable of 6.84%. Monthly this would cost you $2,946.

If you decrease your deposit to $200,000 by paying off your HECS, your $700,000 property will require a $500,000 loan. Over thirty years at 6.84% you’ll be paying $678,265 in interest over the life of the loan and will have monthly repayments of $3,273.

For this scenario, paying the additional $50,000 towards your deposit not only decreases your total interest significantly, but it also lowers your monthly repayments. You can even use that difference of $327 to go towards paying your HECS off early.

The best choice for you will depend on your goals and financial situation. If you’re unsure of what to do, give us a call and we can talk through your options and help you make the best choice for your financial situation.