How HECS Repayments Reduce Your Borrowing Capacity (Australia 2026)
HECS-HELP repayments reduce your home loan borrowing capacity because lenders treat the compulsory annual repayment as a committed expense — just like rent, credit card payments, or car loans. Here is exactly how the calculation works.
The Serviceability Framework
Lenders assess borrowing capacity through a serviceability buffer — they calculate whether you can afford repayments at the interest rate plus 3% (the APRA buffer). Your income is measured against committed expenses (taxes, HECS, living costs, existing debts) to determine the surplus available for mortgage repayments.
$$\text{Borrowing capacity} = f\left(\text{Income} - \text{Tax} - \text{HECS repayment} - \text{Living expenses (HEM)} - \text{Other debt repayments}\right)$$
HECS reduces the income available for mortgage repayments — directly reducing borrowing capacity.
Step-by-Step Calculation — Single Borrower
Borrower profile:
- Gross income: $95,000/year
- HECS balance: $28,000
- No other debts, no dependants
Step 1: Calculate annual HECS repayment
At $95,000 income, the compulsory repayment rate is 5.5% (FY2024–25 thresholds).
$$$95,000 \times 5.5% = $5,225 \text{ per year} = $435 \text{ per month}$$
Step 2: Lender deducts HECS from available income
The $435/month is treated as a committed outgoing — like a loan repayment.
Step 3: Estimate borrowing capacity impact
At current assessment rates (~8.85% buffer on a ~5.85% rate), each $100/month of committed expense reduces borrowing capacity by approximately $13,000–$16,000.
$$$435/\text{month} \times \sim$14{,}500 \approx $63{,}000 \text{ reduction in borrowing capacity}$$
Without HECS at $95,000 income: ~$570,000–$600,000 borrowing capacity (indicative) With HECS at $95,000 income: ~$510,000–$540,000 borrowing capacity (indicative)
These are illustrative estimates. Actual borrowing capacity depends on living expenses, lender policies, and the specific serviceability model used.
Borrowing Capacity Impact by Income Level
| Gross income | HECS repayment rate | Annual repayment | Monthly repayment | Approx. borrowing capacity reduction |
|---|---|---|---|---|
| $60,000 | 2.0% | $1,200 | $100 | ~$14,000–$16,000 |
| $75,000 | 3.5% | $2,625 | $219 | ~$30,000–$35,000 |
| $90,000 | 5.5% | $4,950 | $413 | ~$57,000–$65,000 |
| $110,000 | 6.5% | $7,150 | $596 | ~$82,000–$93,000 |
| $130,000 | 8.0% | $10,400 | $867 | ~$120,000–$135,000 |
| $150,000 | 9.5% | $14,250 | $1,188 | ~$165,000–$185,000 |
Reductions are approximations based on typical lender serviceability models. Actual impact varies by lender and individual circumstances.
Key Insight: Balance vs Income Rate
The HECS balance does not directly change borrowing capacity — the income-based repayment rate does.
| Scenario | HECS balance | Income | Monthly repayment | Impact on borrowing |
|---|---|---|---|---|
| Graduate, early career | $40,000 | $60,000 | $100 | Small |
| Same person, 5 years later | $35,000 (indexed, partly repaid) | $90,000 | $413 | Moderate |
| High-income professional | $80,000 | $150,000 | $1,188 | Significant |
Two people with the same HECS balance but different incomes have different borrowing capacity impacts — because the repayment rate is income-driven.
How Different Lenders Treat HECS
Most lenders follow broadly the same approach — using the ATO compulsory repayment schedule for the borrower’s current income. However, there are differences:
- Some lenders use the actual employer withholding (which may differ from the ATO schedule if the employer withholds at different rates)
- Some lenders may take a conservative approach and use a higher repayment estimate
- Assessment at buffered rate (+3%): Some lenders note that if income grows, the HECS repayment will also grow — some factor this in, others don’t
A mortgage broker can compare how specific lenders model HECS in their serviceability calculators — finding the most favourable assessment for your situation.
What Happens When HECS Is Fully Repaid?
When you repay HECS in full:
- The ATO adjusts your tax file
- Your employer stops withholding additional amounts for HECS
- The committed repayment obligation ceases
- Your borrowing capacity improves accordingly
You can notify your lender (when applying) that HECS has been repaid and provide evidence (e.g., ATO confirmation, updated notice of assessment) — the lender will then not factor HECS into serviceability.
Frequently Asked Questions
Does my HECS balance affect borrowing capacity if my income is below the threshold?
No — if your income is below $54,435 (FY2024–25), no compulsory repayment is required. Lenders assess the obligation based on your current income. If income is below threshold, HECS has no borrowing capacity impact.
Does HECS affect both borrowers in a joint application?
Yes — each borrower’s HECS repayment obligation is assessed individually. In a joint application, both borrowers’ HECS repayments are deducted from the combined available income.
My employer doesn’t deduct HECS from my payslip. Does the lender still count it?
Yes — regardless of employer withholding arrangements, lenders assess your compulsory repayment obligation based on income. The obligation exists regardless of payslip deduction timing.
Related Guides
- Does HECS Debt Affect My Home Loan Borrowing Power?
- Should I Pay Off HECS Before Applying for a Mortgage?
- HECS and Joint Home Loans
- HECS Debt and Home Loans Hub
This article provides general information about HECS repayments and borrowing capacity in Australia. Borrowing capacity estimates vary significantly by lender and individual circumstances. Speak with a licensed mortgage broker for an accurate assessment. Find one through MoneySmart.