If you are trying to buy your first home in Australia, there is a good chance you are juggling more than one financial goal at the same time. You might be paying rent, managing everyday living costs, watching property prices closely, and trying to build a deposit, all while carrying a HECS or HELP debt from your studies.
This creates a very real and common question. Should you focus on paying off HECS first, or should you prioritise saving for a home deposit?
For many buyers, especially in Sydney, this decision feels high stakes. Paying off HECS can feel like “cleaning up” your finances. Saving a deposit can feel like the only way to get a foot in the market before prices move again. Both choices can seem sensible, but each comes with trade-offs that are not always obvious at first glance.
As a mortgage broker in Sydney, we see this dilemma regularly. The challenge is that HECS home loan assessment works differently to other debts, and saving a deposit does not always solve serviceability limits on its own. What lenders actually look at can be quite different from what many borrowers expect.
In this guide, we explain how Australian lenders currently assess HECS, how it can affect borrowing capacity, and the pros and cons of paying off HECS versus saving for a deposit. The aim is to give you clear, factual information so you can make informed decisions, without assumptions, hype, or one-size-fits-all answers.
How HECS or HELP Debt Works in Australia Today
Before weighing up which priority comes first, it helps to understand how HECS or HELP actually works in practice.
HECS or HELP is an income-contingent student loan administered by the Australian Government. Unlike a personal loan or credit card, it does not require regular repayments unless your income exceeds a minimum threshold set by the Australian Taxation Office.
Key features of HECS include:
- Repayments only apply once your income passes the annual threshold
- Repayments are assessed through the tax system and may be withheld via PAYG if disclosed to an employer
- The debt does not attract interest like a standard loan, but it is indexed annually
- The indexation method is set by legislation and may change over time
- Voluntary repayments are optional, not mandatory
Indexation rates change each year and are set by legislation. This means the balance can increase over time, even if you are making compulsory repayments. Information on thresholds and indexation is published by the ATO and MoneySmart, and these figures can change from year to year.
From a lender’s perspective, HECS sits in its own category. It is not unsecured consumer debt, but it is also not ignored.
How Lenders Typically Assess HECS When You Apply for a Home Loan
One of the biggest misconceptions we see is that lenders either fully ignore HECS or fully count the outstanding balance. In reality, the assessment is more nuanced.
Many Australian lenders focus on the repayment obligation rather than the total HECS balance, although assessment can vary by lender.
If your income is above the repayment threshold, lenders usually factor an estimated HECS repayment into your serviceability calculation. This is treated as an ongoing financial commitment, similar to tax or other statutory deductions.
Key points to understand:
- If your income is below the threshold, some lenders may not include a HECS repayment at all
- If your income is above the threshold, a repayment is typically included
- The repayment amount is often calculated using current ATO rates
- The total HECS balance is usually not deducted dollar-for-dollar
- Policies can vary between lenders and may change without notice
This means that two borrowers with the same HECS balance could be assessed very differently, depending on their income level and the lender’s policy.
From a broker’s perspective, this is where lender choice becomes important. Some lenders are more conservative in how they shade income or assess statutory deductions, while others take a more straightforward approach.
Why HECS Often Affects Borrowing Capacity More Than Deposits Do
Another common misunderstanding is assuming that saving a larger deposit automatically fixes borrowing power issues caused by HECS.
In practice, serviceability usually has a bigger impact on borrowing capacity than deposit size.
If a lender’s calculator shows that your income, after tax and commitments, does not comfortably service the loan amount, a larger deposit alone may not solve that issue. HECS repayments reduce your net income in the eyes of the lender, which can cap the maximum loan size they are willing to consider.
This is one reason some buyers with strong savings still find their borrowing capacity lower than expected. The presence of HECS does not stop approval, but it can quietly limit how much you can borrow.
Understanding this interaction early can help avoid frustration later in the process.
What Paying Off HECS Early Actually Changes
Paying off HECS early is a personal financial decision and is not required by lenders. From a lending perspective, it can change certain aspects of your assessment, but it does not always have the impact people expect.
Potential benefits of paying off HECS
If HECS is fully repaid:
- There may no longer be a HECS repayment included in serviceability
- Your assessed net income may increase slightly
- Some lender calculators may show a higher borrowing capacity
- Cash flow may feel simpler without a statutory repayment
In scenarios where HECS repayments are a binding constraint on serviceability, removing them can make a noticeable difference.
Potential downsides of paying off HECS
However, there are important trade-offs:
- Funds used to repay HECS cannot be used for a deposit
- HECS does not accrue interest like consumer debt
- Paying it off does not guarantee higher borrowing capacity
- It may delay your ability to enter the property market
- The money becomes inaccessible once paid
From a broker’s point of view, we often see cases where paying off HECS helps marginally, but not enough to outweigh the loss of deposit funds.
What Prioritising a Home Deposit Usually Achieves
Saving for a home deposit is often the more visible and motivating goal. Deposits are tangible, and reaching a savings milestone can feel like progress.
Potential benefits of focusing on deposit savings
A stronger deposit may:
- Reduce your loan-to-value ratio (LVR)
- Improve lender choice in some scenarios
- Reduce or avoid lenders mortgage insurance, depending on the lender
- Demonstrate a genuine savings history
- Leave you with funds for upfront costs and buffers
For many first home buyers, deposit size is the key barrier to entry, especially in higher-priced markets.
Potential limitations to be aware of
That said:
- HECS repayments may still limit borrowing capacity
- A larger deposit does not always offset serviceability limits
- Loan size may still be capped by income
- Policy differences between lenders still apply
This is why deposit strategy and HECS strategy need to be considered together, not in isolation.
How Different Lenders Can Reach Different Outcomes With the Same Numbers
One practical point we see as brokers is that lenders don’t always assess the same scenario the same way.
Differences may include:
- How HECS repayments are calculated
- How income is shaded or averaged
- How living expenses are benchmarked
- How buffers are applied to interest rates
- How other commitments are assessed
This means two borrowers with the same income, HECS balance, and deposit could receive very different borrowing outcomes across lenders.
As a Sydney mortgage broker, our role is often to test multiple lender calculators and policies to see where the pressure point really sits. Sometimes HECS is the issue. Other times, it is living expenses, dependants, or loan structure.
Special Considerations for Teachers and HECS Debt
Teachers are a group where HECS assessment can sometimes differ.
Some lenders may:
- Consider part-time, contract, or casual teacher income with sufficient history
- Accept shorter employment periods for casual teachers with consistent payslips
- Exclude HECS from liabilities in certain circumstances, depending on income and policy
This is not universal and depends heavily on the lender’s criteria at the time of application. Employer letters are generally not required, but additional verification may still be requested.
Where applicable, some lenders may also offer LMI waivers for eligible teachers, subject to strict criteria and panel access. These policies change and are not guaranteed.
Why Timing Matters More Than Most Buyers Realise
Timing can play a major role in this decision.
For example:
- A pay rise may push income above the HECS threshold
- Indexation may increase the HECS balance
- Interest rate changes may reduce borrowing capacity
- Property prices may move faster than savings
What makes sense this year may not make sense next year. This is why static advice like “always pay off HECS first” or “never pay off HECS” can be misleading.
Common HECS and Home Loan Myths We Regularly See
Over time, we see the same misunderstandings come up again and again.
- HECS does not automatically prevent home loan approval
- Paying off HECS does not guarantee approval or higher borrowing power
- Lenders do not all assess HECS the same way
- HECS indexation is not the same as loan interest
- Saving a deposit does not always solve serviceability limits
Clearing up these myths early can save a lot of stress later.
How Brokers Typically Compare HECS Versus Deposit Scenarios
From a practical standpoint, we usually look at both options side by side.
This can involve:
- Running serviceability with and without HECS repayments
- Testing different deposit levels
- Comparing multiple lender policies
- Identifying whether income or deposit is the limiting factor
- Explaining trade-offs clearly so you can decide
The goal is not to tell you what to do, but to make the impacts visible before you commit your savings.
Key Takeaways to Keep in Mind
- HECS is assessed differently from other debts
- Borrowing capacity is usually driven by serviceability, not deposit size
- Paying off HECS can help in some cases, but not all
- Saving a deposit is important, but not always sufficient on its own
- Lender choice and timing matter more than most people expect
There is rarely a single “correct” answer. The better option depends on how lenders assess your specific scenario at the time you apply.
Bringing It All Together
Deciding whether to pay off HECS or save for a home deposit is rarely a simple yes or no decision. HECS is assessed differently from other debts, and its impact on borrowing capacity can vary depending on your income level, the lender’s policy, and the timing of your application.
At the same time, a larger deposit can improve your position, but it does not always offset serviceability limits on its own.
Understanding how these factors interact under current lending rules can help you avoid committing your savings in a way that may not support your home buying plans. Looking at both scenarios side by side is often the most practical way to see where the real constraints sit before taking the next step.
If you’d like to see how paying off HECS versus saving for a deposit may be assessed under current lender policies, our brokers at Unconditional Finance can help you compare scenarios and explain the trade-offs before you make any major decisions.
Disclaimer: This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, policies and product features vary by lender and may change without notice. You should consider whether this information is appropriate for your circumstances and seek independent financial or tax advice where required.
Frequently Asked Questions (FAQs)
Paying off HECS does not directly affect the interest rate offered by a lender. Interest rates are usually based on factors such as loan type, loan-to-value ratio, and market pricing at the time of application. However, removing a HECS repayment may improve serviceability in some cases, which could indirectly expand lender options available to you.
Yes, many borrowers are approved for home loans while still carrying a HECS or HELP balance. Lenders typically focus on whether a HECS repayment applies based on your income, rather than the total balance itself. A larger balance does not automatically prevent approval, but serviceability still needs to meet the lender’s criteria.
It depends on whether HECS repayments are materially limiting your borrowing capacity. For some borrowers, paying off HECS before applying may improve serviceability. For others, keeping funds for a deposit or cash buffer may be more impactful. Pre-approval outcomes can vary depending on the lender’s policy and calculator assumptions.
Yes. HECS is assessed as a statutory repayment rather than a consumer debt. It does not attract interest in the same way and does not have a fixed repayment schedule. This means lenders usually assess it differently from credit cards, car loans, or personal loans, although it can still reduce assessed net income.
Waiting for HECS to be fully repaid is not required to buy a home. Many buyers enter the market while still repaying HECS through the tax system. Whether waiting makes sense depends on income, borrowing capacity, deposit size, and market conditions at the time. There is no universal rule that applies to all borrowers.