Mortgage broker Sarah Smelt said recent HECS repayment changes would impact people’s borrowing power. (Source: Supplied/AAP)
Most Australians with HECS debts will now keep more of their pay cheque in their pocket, following government changes to repayment rules. Along with an immediate cash boost, the change will also increase borrowing power for many.
The minimum income to start repaying loans has increased from $54,435 to $67,000, and repayments are now based on marginal rates. For someone earning $70,000, that means they will pay about $50 less per fortnight.
Finance Society director and mortgage broker Sarah Smelt told Yahoo Finance paying less in repayments would have a knock-on effect on your borrowing capacity.
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“Based on the way that we calculate how much you can afford to borrow, naturally, now that we have more surplus income because of those changes, your borrowing capacity will increase,” Smelt said.
Banks consider HECS debt to be a liability when assessing home loan applications. Your compulsory repayments are included in your mortgage affordability calculations.
Smelt gave the basic calculation of a person with an income of $85,000 applying for a 30-year loan with a 6 per cent interest rate.
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Prior to the changes, the person would have had a maximum loan amount of $280,000. But after the changes, that could potentially increase to about $310,000, or a $30,000 boost.
“Obviously, it depends person to person,” Smelt said, adding that there were a lot of variables at play.
Under the old system, the government’s HELP repayment estimator shows someone earning $85,000 a year would be paying $3,400 a year in HECS repayments.
With the new system, that drops to $2,700.
Those earning between $67,000 to $125,000 will repay 15 cents for each dollar earned above $67,000, those earning $125,000 and $179,285 will repay $8,700 plus 17 cents for each dollar over $125,000.
Those earning $179,286 and over will continue to pay 10 per cent of their total income.
It comes as banks relax their rules around HECS when assessing mortgage applications.
Following a request from Treasurer Jim Chalmers, APRA and ASIC updated their guidance in February to allow banks to exclude HELP debts when assessing mortgage serviceability if it was due to be paid off in the “near term”.
Commonwealth Bank has since announced it will no longer count HELP debt when they will be repaid within a year.
The bank has also decreased its serviceability buffer for those with debts due to be repaid within five years, from 3 to 1 per cent.
NAB will also no longer count student debts of $20,000 or less when assessing how much buyers can borrow.
Smelt said this was a more “common sense” approach to the debts and would have a “huge impact” on people’s borrowing capacity.
The other knock-on effect of smaller compulsory repayments is that it will naturally take a bit longer to repay your HECS than it would have before.
AJ Financial Planning founder Alex Jamieson told Yahoo Finance the reality was the extra cash would likely get “absorbed” into people’s daily living costs.
But it raises the question of whether it was worth putting extra cash into paying off your HECS debt or diverting it to something else.
Financial adviser Alex Jamieson said lower repayments meant it would take a bit longer to repay your HECS, but there were factors to weigh up before making extra repayments. (Source: AJ Financial Planning/Getty)
“It sort of comes back to that question around what’s the goal? What are they trying to achieve? For some people at that sort of stage of life that they’ve got the HECS debt, the first property might be their key objective,” Jamieson said.
Other people might have credit card debt with a double-digit interest rate, and in this case, Jamieson said it may make sense to pay this down before HECS debt which would have a lower interest rate.
“If you have other debt, there may be better places for the capital to really accelerate the repayments,” he said.
“But if you don’t have any major debts and you’re not saving for a large acquisition like a property purchase, then you’d certainly want to progress paying that off as quickly as you can just to remove that debt.
“With the new variables, it’s going to be sitting around for a much longer period of time.”
The repayment changes come as the government cuts student debts by 20 per cent for all loans that existed on June 1, 2025.
Most reductions will be applied before the end of the year.
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