What comes first, the HECS debt or the mortgage?

Women with CentsBlog, Budgeting, Mortgage

Hi Tash, I’m wondering what the best thing is to do, prioritise buying a house or pay back my HECS debt first? Is being completely debt free better than having a HECS debt and a mortgage? Or is HECS not something I need to worry about paying back so quickly?

Great question! First of all, HECS-HELP is essentially a government loan scheme for eligible students in Australia to be able to cover their university tuition fees without paying large sums of money up-front. There is no interest charged on HECS‑HELP loans but your debt will be indexed each year to reflect changes in the Consumer Price Index (CPI) to maintain its real value.

So because these loans don’t attract “real interest” (that is, any interest above CPI), most experts argue that it’s best to pay off other debts before prioritising your HECS debt. And given that the government has now scrapped any incentives for making extra or early repayments this argument can carry even more weight.

However, when it comes to taking out a mortgage when you have a HECS debt, there are a few things to consider.


Borrowing capacity is impacted by HECS.

Your compulsory HECS repayments are factored into the banks calculations on your ability to repay your loan, or your “servicing ability”. So any HECS (or other debt) you have may reduce how much you can borrow.

Compulsory repayments and thresholds are changing

According to the latest budget, the Government is making some changes to how HECS repayments work. Repayments are going up, and income thresholds are going down – so basically you’ll be required to pay your loan back faster.

There is uncertainty around interest rates and property prices

Our interest rates have been low for some time, but that makes it all the more likely that they will go up in the near future. And similarly, it’s not clear where Australia’s property market is headed. So whilst it may be affordable to pay back both a mortgage and a HECS debt today, in a few years’ time that may not be the case.

So, to help you make a decision here are a few tips:

1. Check your borrowing capacity. Use our Women with Cents Borrowing Capacity Calculator and apply an interest rate of 7-8% to see how much you can realistically borrow.
2. Consider your cash flow. How would your budget cope with having a HECS debt and a mortgage to pay? And if interest rates go up, how much will that affect your ability to repay your mortgage? Grab our handy budget organiser to help you crunch the numbers.
3. Consider how new HELP rules next year will impact you. There is information on the changes in the Government’s media release.

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The information provided by Women with Cents is general in nature. It doesn’t take into account your objectives, personal financial situation or needs. Think of it as educational material in which to help you make more-informed decisions. We recommend you obtain financial, tax and credit advice specific to your situation before making any investments or financial decisions.

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