Borrowing Power · May 2026
HECS Debt and Home Loans — How Student Debt Affects Your Borrowing Capacity in 2026
If you have a HECS-HELP debt and you're planning to buy a home, your student loan is reducing your borrowing capacity right now — likely by more than you realise. The 2025-26 federal budget delivered two significant changes that every borrower with student debt should understand: a 20% debt reduction and a new marginal repayment structure. Here's what changed, what it means for your mortgage application, and what you can do about it.
The 2025-26 HECS Changes: What Was Legislated
1. 20% balance reduction (effective 1 June 2025): All outstanding HECS-HELP, VSL, SSL, ABSTUDY SSL, and other student assistance loan balances were reduced by 20% from 1 June 2025. This was part of the Albanese government's post-election higher education reform package. If you had $60,000 owing, your balance automatically became $48,000 on that date.
2. Marginal repayment system (2025-26 onward): Under the previous system, crossing the minimum repayment income threshold triggered compulsory repayments calculated on your total income — meaning earning one extra dollar above the threshold sharply increased your total HECS repayment for the year. The revised system works on a marginal basis: you only pay the applicable repayment rate on income above each threshold band, not on all income. This is more equitable and reduces the repayment burden for earners near the threshold.
For the current repayment thresholds and rates, refer to the ATO website — thresholds are indexed annually and the specific figures change each financial year. The important structural point is that the system is now marginal, making it less punishing to cross a threshold.
How HECS Affects Your Home Loan Borrowing Capacity
HECS-HELP debt affects your borrowing capacity in one specific way: lenders assess your compulsory HECS repayment as an annual liability, which reduces your net income available to service a mortgage.
Unlike a credit card or personal loan, HECS does not appear on your credit report. Lenders don't see it automatically — they rely on you disclosing it on the application. However, lenders always ask, and your tax return or Notice of Assessment (which shows your HECS balance and annual repayment) will be reviewed as part of income verification.
The key figure lenders use is your annual HECS repayment amount. This is typically extracted from your most recent NOA or calculated by the lender based on your income and the ATO repayment schedule. The annual repayment reduces your monthly surplus, which directly reduces how much mortgage you can service.
Real-World Example: The Impact on a $100k Income
Scenario: Single applicant, $100,000 salary, no other debts
Without HECS: Estimated borrowing capacity ~$530,000–$580,000 (mid-tier lenders)
With $40,000 HECS (post 20% reduction from $50k): Annual repayment ~$4,000–$4,500. Borrowing capacity reduction ~$45,000–$55,000.
Net borrowing capacity with HECS: ~$475,000–$535,000 — a real reduction of approximately $50,000.
The 20% reduction has helped — on a $50,000 pre-June-2025 balance, the reduction to $40,000 means approximately $800–$1,000 less in annual repayments, recovering roughly $10,000–$12,000 in borrowing capacity. That's meaningful but not transformative. HECS still significantly impacts borrowing power.
Should You Pay Down HECS Before Applying for a Home Loan?
This is one of the most common questions we receive from borrowers in their 20s and 30s. The answer depends on your specific financial position, but here's the framework:
HECS has no interest charge — it only has CPI indexation. In the 2025-26 financial year, the ATO has not yet indexed the balance (as the 20% reduction applied first). Historically, HECS indexation runs at 2–5% CPI per year. Compare this to your mortgage rate (currently 5.8–6.2% for most products) and a savings account return (4–5%).
Voluntary HECS repayments do not immediately improve your borrowing capacity in the same year — because lenders use your most recent NOA (which reflects the balance at that point in time). A voluntary payment in October 2026 may not show in your borrowing capacity assessment until July 2027 when the new NOA is issued.
The smarter approach for most buyers: Use the money for your deposit rather than paying down HECS. A larger deposit directly improves your LVR, unlocks better rates, and may allow you to avoid LMI — which is worth significantly more than the borrowing capacity improvement from the same dollar applied to HECS repayment.
Exception: if you're on the cusp of capacity
If the HECS repayment is the specific item preventing you from reaching your borrowing target, and paying it down would unlock the capacity you need, then a voluntary repayment 12+ months before applying (so it appears in your most recent NOA) may be worth modelling. Book a consultation and we'll run the numbers for your specific situation.
Strategies for HECS Holders Buying Their First Home
1. Choose the right lender. Different lenders assess HECS repayments differently — some use the ATO schedule directly, others apply their own conservative loading. The right lender choice can recover $15,000–$25,000 in borrowing capacity for the same HECS balance.
2. Close credit card limits. For a borrower already constrained by HECS, a $15,000 credit card limit (assessed at 3.8% = $570/month) has the same borrowing capacity impact as a $15,000 HECS annual repayment. Closing credit cards you don't need 3 months before applying often recovers more capacity than any other single action.
3. Use the First Home Guarantee Scheme. If you qualify (5% deposit, eligible property), accessing the FHGS means you don't need to save an extra 15% to avoid LMI. This can bring your buying timeline forward by 1–2 years — during which your HECS balance reduces through regular repayments anyway.
4. Include your partner's income. If you're buying as a couple and only one of you has HECS, the combined borrowing capacity is often significantly higher than a single application — because the partner's income services a larger proportion of the mortgage, while the HECS impact is proportionally smaller.
Bridge Finance works with a significant number of clients in their 20s and 30s navigating HECS alongside home ownership goals. Book a free consultation to get a clear picture of where you stand and what options are available to you.
About the Author
William Zhu
Director, Bridge Finance. 8 years of mortgage broking + 5 years in construction. $600M+ settled. Access to 70+ lenders. MFAA member.
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© 2026 Bridge.Finance Pty Ltd ATF Zhu Family Trust. Credit Representative 567817 of Australian Credit Licence 384704. MFAA Member. AFCA Member.
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