HECS Debt and Home Loans 2026: How It Cuts Your Borrowing Power
If you carry HECS or HELP debt and are trying to buy a home in 2026, you have probably already discovered the painful truth: your student loan crushes your borrowing capacity. The federal government's HECS reforms of 2024 and 2025 have changed the arithmetic significantly, but HECS debt remains one of the single largest variables in a home loan approval.
This guide explains exactly how banks assess HECS debt, the dollar impact on your loan, the 2025 APRA guidance updates, and the most effective strategies to maximise your borrowing capacity with HECS on your file.
How Lenders Assess HECS Debt
HECS and HELP repayments are compulsory deductions that reduce your take-home pay once you earn above the minimum threshold. As part of the 2024-25 reform package the threshold was lifted to $67,000 for 2025-26 (up from $54,435), and repayments moved to a marginal system: 15% on every dollar of income between $67,000 and $125,000, and 17% on every dollar above $125,000. This means the full repayment is calculated only on income above the threshold rather than on your total income.
Lenders treat HECS repayments as an ongoing living expense. They calculate the monthly HECS repayment based on your pre-tax income and the marginal schedule above, and deduct it from your net surplus before calculating the loan size you can service.
Crucially, unlike personal loans or credit cards, you cannot pay HECS down quickly to remove it from your loan assessment. Voluntary repayments reduce your balance, but lenders still assess the ongoing compulsory repayment based on your current income under the marginal schedule.
The Dollar Impact: 2026 Worked Examples
Here is the borrowing capacity impact for a single applicant earning varying incomes with varying HECS balances, using a typical 6.50% investor rate plus the APRA 3% buffer and the 2025-26 marginal HECS schedule.
| Income | HECS Balance | Annual HECS Repayment (marginal) | Max Borrowing (no HECS) | Max Borrowing (with HECS) | Reduction | |---|---|---|---|---|---| | $80,000 | $30,000 | ~$1,950 | ~$440,000 | ~$400,000 | -$40,000 | | $100,000 | $40,000 | ~$4,950 | ~$555,000 | ~$495,000 | -$60,000 | | $120,000 | $50,000 | ~$7,950 | ~$665,000 | ~$580,000 | -$85,000 | | $150,000 | $60,000 | ~$13,150 | ~$820,000 | ~$700,000 | -$120,000 | | $180,000 | $80,000 | ~$18,050 | ~$975,000 | ~$810,000 | -$165,000 |
In broad terms, the marginal schedule significantly softens the impact at lower incomes (because the threshold is now $67,000 rather than $54,435) but the impact compounds quickly once income passes $125,000 and the 17% marginal rate kicks in.
The 2024 and 2025 HECS Reforms
The federal government has made three structural changes to HECS since mid-2024 that affect borrowers:
2024 indexation reform. HECS balances are now indexed to the lower of CPI and wage growth (previously just CPI). This one-off change wiped around 20% off inflated 2023 balance growth for most borrowers.
2025 20% HECS debt reduction. Legislated and applied by the ATO, a one-off 20% reduction to all outstanding HECS/HELP balances that existed on 1 June 2025. A $45,000 balance became $36,000. Most eligible account reductions were processed before the end of 2025; more complex cases continued into early 2026.
2025 threshold and marginal repayments. The compulsory repayment threshold lifted from $54,435 to $67,000 for the 2025-26 income year, and repayments moved to a marginal schedule: 15% on income between $67,000 and $125,000, and 17% on income above $125,000 (previously a tiered rate on total income).
Combined, these changes meaningfully improved borrowing capacity for HECS holders, particularly those earning under $80k.
How Much Does Each $10k of HECS Cost in Borrowing Capacity?
This is a common question and the answer varies by income bracket.
- Earning $60k to $80k: Each $10k of HECS balance costs 0 to $5k in borrowing capacity (you are near or below the threshold)
- Earning $80k to $120k: Each $10k of HECS balance costs $10k to $20k in borrowing capacity
- Earning $120k to $160k: Each $10k costs $15k to $25k
- Earning above $160k (10% rate): Each $10k costs $18k to $28k
Lenders model the full ongoing repayment stream, not just the current balance, which is why the impact is larger than the debt itself.
See Properties You Can Actually Afford
PropBuyAI shows you realistic purchase prices, monthly cash flows, and affordability scenarios accounting for HECS and other liabilities.
Start Free →Strategies to Maximise Borrowing With HECS
1. Pay Off HECS Completely Before Applying
The most effective strategy. Zero HECS removes the liability from your loan assessment. However, paying off $50k of HECS to unlock $75k of additional borrowing is only rational if you have the savings and other priorities (like deposit) do not suffer.
2. Use a Tax Variation
Lenders assess HECS based on your gross income and apply a standard repayment calculation. A variation cannot remove HECS, but some lenders will accept evidence of a substantially lower-than-expected balance to reduce the modelled ongoing repayment.
3. Shop Around: Lender Policies Vary
Not all lenders assess HECS identically. Major banks tend to use strict standard tables; some smaller lenders and non-banks may be more generous in their treatment. Working with a mortgage broker who knows the nuances can add 5% to 10% to borrowing capacity.
4. Joint Application With a Non-HECS Partner
If your partner has no HECS, a joint application can dilute the impact. HECS is calculated per-applicant, so a 50/50 joint applicant with no HECS brings their full borrowing capacity to the table.
5. Overseas Work to Pause HECS
HECS repayments stop when you leave Australia for work above the earnings threshold overseas (though you still owe the debt). This is a niche strategy but valid for professionals taking international contracts.
6. Consider Guarantor Loans
A parental guarantor can replace a portion of your required deposit with their own equity, giving you access to a larger loan without LMI despite the HECS constraint. See our deposit guide.
7. Delay Until the Reforms Flow Through
If you received the 2025 20% HECS cut, wait until your ATO balance reflects the reduction (usually within 6 months of June 2025) before applying. Some lenders use recent balance data; others rely on PAYG deductions.
Investment Properties: Does HECS Matter Differently?
Yes. For investment property loans, HECS reduces borrowing capacity the same way as for PPOR loans, but the expected rental income partially offsets the serviceability gap. Lenders typically apply a 75% to 80% rental income shading against gross rent (to account for vacancy, management fees, maintenance), which gets added to your servicing calculation.
A $30k per year rental income adds approximately $22,500 of assessable income (at 75%) to your serviceability, which translates to roughly $250,000 of additional borrowing capacity at typical rates. This can offset a significant portion of the HECS drag.
For investment modelling, see our investment property calculator and cashflow forecasting guide.
HECS and First Home Buyer Schemes
Several federal and state first home buyer schemes reduce the impact of HECS indirectly:
- First Home Guarantee: 5% deposit with no LMI. HECS still affects serviceability, but the lower deposit requirement is friendlier for HECS holders.
- Help to Buy: Government equity contribution of up to 40% reduces required loan size. HECS impact on serviceability is significantly less destructive when the loan is smaller.
- FHSSS: Super withdrawal for deposit does not interact with HECS directly, but frees up cash that may otherwise have been spent paying HECS voluntarily.
See Help to Buy scheme and first home buyer guide for full details.
Common HECS Myths
Myth: I can pay off HECS with my home loan and consolidate. Reality: HECS is not a conventional debt you can refinance into a mortgage. You must pay it through ATO channels.
Myth: Voluntary HECS repayments do not help. Reality: Any voluntary repayment reduces your balance and the ongoing repayment stream. The 2017 "bonus" for voluntary payments was removed, but paying down still reduces future impact.
Myth: HECS shows on my credit file. Reality: HECS does not appear on a standard credit report. Lenders identify it through PAYG income statements, tax returns, and ATO prefill data at application.
Myth: Once my income drops below the threshold, my HECS is forgiven. Reality: HECS balances remain permanently until repaid, paused until income rises again, or cancelled by death or specific teacher-student location concessions.
Bottom Line
HECS debt is a persistent borrowing capacity drag for Australian home buyers in 2026, typically reducing max loan size by $50k to $200k depending on income and balance. The 2024 and 2025 reforms have eased the burden materially but not eliminated it.
The most effective strategies are (1) paying HECS off completely if deposit is not constrained, (2) joint applications with non-HECS partners, (3) specialist lender shopping, and (4) Help to Buy for first home buyers. Use PropBuyAI to model exactly what you can afford with your current HECS position. Explore pricing.