Saving for a down payment isn’t the only thing that many young Australians must do in order to purchase a home. The unseen barrier that prevents them from moving forward is student loan debt, which lowers their borrowing capacity and makes lenders reluctant to grant mortgages.
This burden may now be lessened by new regulations that permit banks to ignore HECS-HELP debt in certain mortgage applications. Will this, however, truly benefit first-time purchasers?
How HECS Debt Affects Mortgage Approvals
| Factor | Impact on Home Loan Application |
|---|---|
| Total HECS Debt | Doesn’t matter as much as how long it takes to repay |
| Annual Repayments | Directly lowers borrowing capacity |
| Bank Lending Policies | Some lenders are more flexible than others |
| Regulatory Changes | New rules allow banks to ignore HECS in some cases |
| Income Thresholds | Higher salaries mean larger compulsory repayments |
The dilemma faced by first-time buyers: HECS Debt vs. Home Deposit
A significant barrier to homeownership for 30-year-old physiotherapist Dylan Busst has been student loan debt.
Mortgage brokers cautioned him that his $80,000 HECS-HELP debt would restrict his borrowing power, even after years of diligent saving.
Busst clarified, “They say that it significantly affects my ability to borrow.” “The length of time it will take to pay off the debt is more important than the total amount owed.”
This is a problem that many young professionals face. Many are forced to make a tough decision:
- You will have less money for a down payment on a home if you use savings to pay off HECS early.
- Prioritize saving for a down payment, but run the risk of having your mortgage application denied because of your continuous HECS payments.
- Many prospective homeowners have been kept out of the real estate market by this financial tug-of-war.
The Big Policy Shift: New HECS-HELP Lending Rules
The federal government has stepped in, directing financial regulators (APRA & ASIC) to ease restrictions on student debt when banks assess mortgage applications.
Key Changes in the New Lending Rules:
✔️ Banks can now ignore HECS debt in certain cases when evaluating a borrower’s ability to repay a mortgage.
✔️ Eligibility depends on repayment timeframe—if the applicant is close to fully repaying HECS, it won’t count against them.
✔️ No fixed definition of ‘near term’—but experts suggest it may apply to debts that will be repaid within a year.
Anna Bligh, CEO of the Australian Banking Association, welcomed the move but warned that it won’t open the floodgates.
“This is a sensible adjustment, but it won’t mean every HECS debtor will suddenly qualify for a home loan,” Bligh said.
Will This Change Actually Help First-Time Buyers?
Critics, including Shadow Assistant Minister for Home Ownership Andrew Bragg, argue that the policy shift is too limited.
“This is a tiny tweak that may help a handful of borrowers, but it doesn’t address bigger issues in home lending rules,” Bragg noted.
What’s Missing from the Policy?
1️⃣ It only applies to borrowers who are close to repaying HECS.
2️⃣ No changes to how banks assess long-term student debt.
3️⃣ Doesn’t address the mortgage buffer rates or deposit requirements.
While this change will help a small group, the biggest challenges to homeownership remain high property prices, rising interest rates, and strict lending rules.
Should You Pay Off HECS Before Applying for a Mortgage?
If you’re planning to buy a home, should you clear your HECS debt first?
Pros of Paying Off HECS Before Buying:
✔️ Boosts borrowing power—Lower debt makes mortgage approval easier.
✔️ Avoids HECS indexation—Annual adjustments increase the total amount owed.
✔️ Peace of mind—One less financial obligation.
Cons of Paying Off HECS First:
❌ Less cash for a deposit—You may delay homeownership.
❌ HECS is interest-free—It only rises with inflation, unlike mortgage debt, which has higher interest rates.
❌ You could invest instead—Using extra cash for investments might be smarter than clearing HECS early.
Best Strategy:
- If your HECS debt is nearly repaid, it may be worth clearing it to boost your mortgage eligibility.
- If your HECS debt is large, focus on saving for a deposit first, since HECS has favorable repayment terms.
The Bigger Picture: Home Ownership is Still a Challenge
Even without student debt, young Australians face an uphill battle in the housing market.
- House prices have skyrocketed—The median Sydney home price is over $1.2 million.
- Income growth hasn’t kept pace—Even high-income professionals struggle to save for a deposit.
- Mortgage lending rules are still strict—Even with HECS adjustments, many first-time buyers won’t qualify.
While the policy shift is a step in the right direction, it won’t solve the broader home affordability crisis.
A Small Fix in a Bigger Housing Problem
The new HECS debt lending rules are a positive development, but they won’t radically change home affordability overnight.
For a select group of borrowers, this could mean the difference between getting a mortgage or being rejected. But for most Australians, the real challenges remain high home prices, deposit requirements, and rising interest rates.
What Comes Next?
If policymakers truly want to help first-time buyers, they’ll need to tackle deeper housing issues, including:
🏡 First-home buyer grants that scale with property prices.
📉 More flexible lending criteria for young professionals.
💰 Reforms to reduce deposit and mortgage insurance costs.
The HECS rule change is helpful, but it’s just one piece of a much larger housing puzzle.
