By Chaice Paterson, CEO & Founder, Low Deposit Homes | Updated June 2026
A $40,000 HECS-HELP debt typically reduces your borrowing capacity by approximately $40,000–$60,000 — but it doesn’t disqualify you from buying your first home. For a typical first home buyer earning $90,000, HECS deducts around $4,500 per year in mandatory repayments, which banks treat as ongoing committed expenditure. The good news: paying off HECS before buying is almost always the wrong financial move. Here’s exactly how lenders treat HECS, how to minimise its impact, and why the 5% Deposit Scheme often delivers a better outcome than wiping out your HECS first.
Why does HECS reduce my borrowing capacity?
Banks calculate borrowing capacity by subtracting your committed expenses from your income. HECS-HELP repayments are treated as a mandatory expense because they’re automatically deducted by the ATO once your income crosses the threshold. In 2025-26, the HELP repayment threshold is $54,435 of taxable income. Above that, repayments scale from 1% to 10% depending on your income band.
For a first home buyer earning $90,000, the HECS repayment rate is around 4.5%, equating to approximately $4,050 per year deducted at source. The bank treats this as a permanent reduction in your servicing capacity — even though the debt itself is interest-free in real terms (only indexed to CPI).
How much does HECS actually reduce my borrowing power?
A general rule used by mortgage brokers: every $10,000 of HECS debt reduces borrowing capacity by approximately $10,000–$15,000. For a couple with combined HECS debts of $80,000, that’s a potential $80,000–$120,000 reduction in maximum loan size.
But here’s the nuance: the bank’s calculation focuses on the repayments, not the balance. So someone earning $60,000 with $80,000 HECS has a much smaller monthly repayment than someone earning $120,000 with $80,000 HECS — and therefore a smaller capacity impact.
Should I pay off HECS before buying my first home?
For most first home buyers: no. Here’s why. HECS is the cheapest debt you’ll ever have — interest-free, indexed only to CPI. Paying it off ties up cash that could otherwise become your deposit. On a $1 million new build in Queensland under the 5% Deposit Scheme, you need approximately $54,500 cash on hand. Using $20,000 of savings to pay down HECS instead means you delay home ownership by 6-12 months while you rebuild that buffer.
The exception: if you’re earning over $151,201 (top HECS bracket of 10%), paying down HECS can be worthwhile because the repayment hit is severe. Otherwise, almost always better to redirect that money to deposit.
“I see clients every week who think they need to clear their HECS before they can buy. Eight times out of ten, the maths says the opposite — keep the HECS, use the cash for your deposit, and start building equity now. Every month you wait is rent you’ll never get back.” — Chaice Paterson, founder of Low Deposit Homes
How does Low Deposit Homes structure applications to minimise HECS impact?
Three practical levers:
- Lender selection. Not all lenders calculate HECS the same way. Some use the actual ATO repayment scale; others apply more conservative assumptions. Our broker partners know which lenders are HECS-friendly for first home buyer applications and match you accordingly.
- Income optimisation. If you’re close to a tax bracket threshold (e.g., $54,435), strategic decisions like salary sacrifice or FHSSS contributions can drop your assessable income below the HECS threshold entirely — eliminating the repayment hit for capacity calculations.
- Timing. HECS balance recalculates annually after tax returns. If you’ve paid down a significant portion through wages, the bank’s updated assessment may unlock additional borrowing capacity.
What’s a real scenario for a couple with HECS debt?
Sarah and Michael — both teachers, combined income $145,000. Sarah has $32,000 HECS, Michael has $18,000. They had $55,000 saved and assumed their HECS would block them from buying. After running their numbers with a HECS-aware lender, they qualified to purchase an $880,000 Ipswich house and land package under the 5% Deposit Scheme. The 5% deposit on $880,000 = $44,000, plus settlement costs of approximately $4,000 = $48,000 cash on hand at settlement. With $55,000 saved, they kept a $7,000 buffer in their offset account from day one.
Frequently Asked Questions
Q: Does paying voluntary HECS contributions help my loan application? Marginally. Voluntary HECS contributions don’t reduce your mandatory repayment percentage for the current year — that’s based on your taxable income, not your HECS balance. The benefit comes in subsequent years once the lower balance is reflected in your annual ATO assessment.
Q: Can I get a home loan if my HECS is overdue? HECS doesn’t go “overdue” in the traditional sense because repayments are deducted automatically through your tax return. As long as you’ve been lodging tax returns, your HECS is current by definition. The exception is if you’re earning below the threshold and have voluntary repayment arrangements that have lapsed — speak to the ATO if so.
Q: Does HECS show on my credit report? No. HECS-HELP debt is held by the Australian Taxation Office and does not appear on standard credit reports. Banks see it because they ask for it on the application and verify via your tax assessment notice.
Q: How does the 5% Deposit Scheme help if I have HECS? The 5% Deposit Scheme reduces the deposit you need to save, meaning you can buy sooner with less cash. Less time spent saving = less time paying rent while HECS continues to accrue indexation. For HECS-burdened first home buyers, the 5% Scheme is typically the fastest path to ownership.
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Low Deposit Homes operates under Winning Homes Australia Pty Ltd (ACN 633 321 758). All calculations are indicative. Individual circumstances may vary. This is not financial advice.