Does a HECS-HELP debt affect your home loan application?

Having unpaid HECS or HELP debt probably won't derail your home loan application. But your lender will look at it and the debt will lower your borrowing power.

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By

Richard Whitten

Edited by

Jason Loewenthal

Updated

Fact checked
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Key takeaways

  • HECS or HELP debt is a very low-risk debt, but it can decrease your borrowing power.
  • But indexation means your debt can grow, especially if it's a bigger debt.
  • You could pay off your uni debt to boost your chances of approval, but there are other steps to take first.

Will my HECS-HELP debt hurt my home loan application?

For most borrowers, having a HECS-HELP debt doesn't mean your home loan application will be rejected. Because repayments come out of your salary automatically (if you're earning above the income threshold), it doesn't affect your income in the way other debts do.

According to regulator APRA, lenders must factor HECS-HELP into your debt-to-income ratio (DTI) when considering your loan application.

HECS-HELP debt can therefore limit your maximum borrowing capacity, even if it's unlikely to derail your whole application.

Indexation, not interest

HECS-HELP debts don't incur interest the same way other loans do. But they are indexed for inflation. This means every year on 1 June your loan amount is adjusted upwards, based on either the Consumer Price Index or Wage Price Index (whichever is lower).

Let's say you had a $30,000 debt. It's indexed at 4.0%. That means it would increase by $1200.

If you're earning enough to repay your HECS-HELP debt, the indexation increase should be less than your repayments. But with higher loan amounts the indexation could outweigh the amount you've repaid in a year.

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Expert insight: Why HECS-HELP debts matter

"Any debts and ongoing costs you have can affect your ability to borrow, and sometimes can make the difference between getting onto the property ladder or being left behind. This is why it's so important to understand your borrowing power and capacity. From there, you can look at the impact of making changes like paying down HECS-HELP or other debts, to put yourself in the best position to execute on your property plans."

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Financial adviser & founder, Pivot Wealth

Should you repay your HECS-HELP debt before getting a home loan?

Higher education loans like HECS and HELP don't come with interest charges, and are generally considered your least urgent debts.

Many borrowers (including this author) have no trouble getting their home loans approved despite having HECS-HELP debts. But the bigger the debt the more it affects your borrowing power.

It's not a bad idea to repay a bit more of your student debt before applying for a home loan. But as a general rule of thumb you're probably better off focusing on higher interest debts first, like your credit card or a car or personal loan.

How HECS-HELP debt affects your debt-to-income ratio

When you apply for a home loan your lender examines many things, including your income, assets, debts and expenses. Every lender has different methods for calculating how much you can safely borrow.

One important calculation is your DTI. Your DTI is calculated by dividing your total debts by your annual income. Here's a quick example:

  • You want to apply for a $400,000 home loan
  • You have $3,600 left on your car loan and a $10,000 HELP debt
  • You earn $100,000 a year and have no other income or debts
  • Your DTI calculated as $413,600 ÷ $100,000 = 4.136

Your DTI is therefore 4.136.

Recently the Australian Prudential Regulation Authority (APRA) informed the lenders it supervises that HECS-HELP debt must be considered when calculating a borrower's DTI. Prior to this clarification it seems some lenders were looking at these debts more closely than others.

🔥 Hot tip: Ask a lender about your HECS debt before you apply

Got a big HECS-HELP debt? Before you submit a full application for a home loan, you could ask your lender how much your outstanding debt will hurt your borrowing power.

Every lender has its own standards and lending criteria. Some may not care too much at all, while another lender may have a problem with it.

Mortgage brokers can also help you find a suitable lender in this scenario, as they have a good sense of different lenders' criteria.

How to improve your chances of home loan approval

If you're worried your HECS-HELP debt could hurt your home loan application or cut your borrowing power drastically, don't panic. There are steps you can take to minimise the effects of your HELP debt and potentially increase your borrowing capacity.

Paying off your least urgent debt (your no-interest HECS-HELP loan) is probably not the first thing you'd do.

Here are some tips to improve your borrowing position:

  • Pay off your your most urgent, high-interest debts first. Debts like credit card and personal loan debt are a bigger issue for most borrowers than HECS.
  • Take another look at your monthly spending and identify ways you can cut back. Ideally, cut back your spending in the months before your application.
  • Check your credit score before applying. HECS-HELP debt won't directly affect your credit score. But checking your credit score can help you identify any nasty surprises (or mistakes) in your credit report.
  • Be realistic about your borrowing capacity. The more you stretch your borrowing capacity the more your uni debt will start to weigh down your application.
  • Don't overapply. Every full loan application you submit is a mark on your credit score. That's why you only want to apply with one lender. If this lender rejects your application completely, then you have to apply somewhere else.

Sources

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To make sure you get accurate and helpful information, this guide has been edited by Jason Loewenthal as part of our fact-checking process.
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Senior Money Editor
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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise
Richard has written 755 Finder guides across topics including:
  • Home loans
  • Credit cards
  • Personal finance
  • Money-saving tips
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