Should I Pay Off HECS Before Applying for a Mortgage? (Australia 2026)
Paying off HECS before applying for a home loan improves your borrowing capacity — but it also reduces your deposit. Whether it is the right move depends on the trade-off between these two competing effects.
The Core Trade-Off
Using savings to repay HECS:
- ✅ Increases borrowing capacity — the compulsory repayment obligation ceases
- ❌ Reduces your deposit — less cash for the property purchase
- ✅ Eliminates CPI indexation risk — the balance stops growing
- ❌ Delays your purchase — if savings are redirected to HECS repayment
How Much Does Repaying HECS Improve Borrowing Capacity?
Based on the income-driven repayment obligation:
| Income | Monthly HECS repayment | Approx. borrowing capacity improvement if repaid |
|---|---|---|
| $70,000 | $175/month | ~$25,000–$30,000 |
| $90,000 | $413/month | ~$57,000–$65,000 |
| $110,000 | $596/month | ~$82,000–$93,000 |
| $130,000 | $867/month | ~$120,000–$135,000 |
Indicative estimates — actual figures depend on lender and full financial profile.
How Much Does Using Savings Reduce Your Deposit?
If you use $30,000 of savings to repay HECS:
- Your deposit decreases by $30,000
- On an $800,000 purchase with 10% deposit ($80,000 needed): you now have only $50,000
- You may need LMI (loans above 80% LVR) or a lower purchase price
The net effect of repaying HECS depends on whether the borrowing capacity gain outweighs the deposit loss.
Worked Example — Should Jamie Repay HECS?
Jamie’s profile:
- Income: $95,000/year
- HECS balance: $30,000
- Savings: $80,000 (targeting an $800,000 property)
- Current borrowing capacity (with HECS): ~$530,000
- Current deposit position: $80,000 (10% of $800,000)
Scenario A: Keep HECS, use all savings as deposit
- Deposit: $80,000 (10%)
- Borrowing: $720,000
- But borrowing capacity with HECS: ~$530,000
- Problem: Can’t borrow enough — gap of $190,000
Scenario B: Repay HECS ($30,000), remaining $50,000 as deposit
- Deposit: $50,000 (6.25% of $800,000)
- Borrowing capacity (no HECS): ~$593,000
- Can now borrow the $750,000 needed? Closer — but deposit is very low (LMI required)
Scenario C: Target a lower-priced property (e.g., $640,000)
- With HECS and $80,000 deposit: 12.5% deposit, borrowing $560,000 → within capacity (~$530k — marginal)
- May need to target $580,000–$600,000 purchase price
This illustrates that HECS primarily affects which purchase price range is accessible — not just deposit percentage.
When Paying Off HECS First Makes Sense
Consider repaying HECS first if:
- You are close to full repayment — if the balance is under $10,000–$15,000, clearing it costs relatively little deposit but removes the ongoing repayment obligation
- You are a high-income earner — at $130,000+, the monthly HECS repayment is large; the borrowing capacity gain from repayment is significant
- You have more savings than needed for deposit — if you have $150,000 saved and only need $80,000 deposit, using $30,000 for HECS leaves $120,000 — still above deposit requirement
- HECS indexation is high — in years of high CPI (2022–2024 saw indexation of 3.9–7.1%), HECS balances grew rapidly; paying down principal in high-indexation environments makes more financial sense
When Keeping HECS and Saving More Makes Sense
Consider keeping HECS if:
- Your balance is large ($60,000+) — the deposit cost of repaying is too high relative to the borrowing capacity gain
- Your income is low-to-moderate — at $60,000–$75,000, the monthly HECS repayment is small; the borrowing capacity gain is modest
- Property prices are rising faster than HECS indexation — the opportunity cost of staying out of the market may exceed the cost of carrying HECS
- You have other higher-cost debts — credit cards and personal loans have far greater impact on borrowing capacity per dollar than HECS
HECS Indexation — The Background Cost
HECS-HELP is not interest-bearing in the traditional sense, but it is indexed to CPI each June 1. In recent years:
| Year | Indexation rate |
|---|---|
| FY2021–22 | 3.9% |
| FY2022–23 | 7.1% |
| FY2023–24 | 4.7% |
| FY2024–25 | ~2.5–3% (estimate) |
A $40,000 HECS balance at 7.1% indexation grows by $2,840 in one year — even if you made repayments. This has accelerated interest in voluntary HECS repayments.
Voluntary repayments are penalty-free at any time via MyGov/ATO — and there is no prepayment bonus (the 5% bonus was abolished from 2022).
Frequently Asked Questions
Can I deduct HECS from taxable income?
No — HECS repayments are not tax-deductible. They are a tax liability (compulsory) but not a deductible expense.
What happens if I pay off HECS in June just before indexation?
If your balance is paid in full before 1 June, you avoid that year’s indexation on the balance. Timing voluntary repayments before 1 June is a common strategy when balances are small.
My employer doesn’t know about my HECS. Does that matter?
Not for lender purposes — the lender assesses your obligation based on your income, not employer withholding. However, you should notify your employer of your HECS debt via the tax declaration form (TFN Declaration) to ensure correct withholding and avoid a large ATO bill at tax time.
Related Guides
- HECS vs Saving for a House Deposit — Which Should Come First?
- Does HECS Debt Affect My Home Loan Borrowing Power?
- How HECS Repayments Reduce Your Borrowing Capacity
- HECS Debt and Home Loans Hub
This article provides general information about HECS repayment strategy in Australia. This is not financial or tax advice. For advice tailored to your income, savings, and property goals, speak with a licensed mortgage broker or financial adviser. Find one through MoneySmart.