Student loans can reduce your home loan borrowing power, but not in the way you may expect.

More than three million Australians have HECS university debts or similar government-supported study loans, with the average loan worth about $26,500.  

But as home prices rise and saving for a home deposit gets harder, home buyers are looking at different ways to boost their borrowing power to get into the property market sooner, including weighing up whether to clear their student loans.  

Mortgage Choice broker Larissa Barton said many home buyers had student debts, and they often worried about the size of their debts.  

“The size of your HECS debt has no direct impact on your borrowing capacity, it’s actually the income that you’re earning that will determine how much you have to make in repayments,” Ms Barton said.  

She said lenders were focused on how much student loan repayments would be because they reduce take-home pay, which reduces how much can go towards mortgage repayments. 

HECS debts and other student loans will take a portion of your pay packet depending on how much you earn over $51,550 for the 2023-24 financial year.  

The amount you pay back rises incrementally as you earn more, regardless of how big your student debt is. 

Home buyers need to consider how much their study loan repayments reduce their take-home pay. Picture: Getty

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So a person earning $60,000 will pay the minimum rate of 1% of their income per year towards their student debt, while someone earning $151,201 or more will have to pay the top rate of 10% of their income back to their debt annually. 

“You could have a $200,000 HECS debt while earning under $51,550 a year and you won’t have to make any repayments,” Ms Barton said.  

“But if you’re on $100,000 per year, then you have pay back 6.5% a year, or more than $6,000 annually, and that’s what the lender will take into account.”  

When it pays to clear your student loan before buying a home  

Whether to pay off a student debt early or hold onto those savings for a larger home deposit is a common dilemma facing home buyers saddled with student loans. 

Ms Barton said home buyers could improve their borrowing power if they were able to pay off their student loan entirely before applying for a mortgage. 

But she said home buyers, especially first-home buyers, may not have the spare funds available to pay off their student loans in full and have enough for a home deposit too.  

Where it made the most sense to pay off your student debt early was if you had a small student debt amount left owing and you were earning a high income, Ms Barton said. 

For example, let’s say a home buyer has $5,000 remaining on their student loan and they are earning $100,000 per year. 

That home buyer could free up hundreds of dollars in extra income by paying off their student loan with some of their deposit, which would boost the size of their home loan repayments as well as their overall borrowing capacity. 

Home buyers can boost their borrowing power if they're able to pay off their student debts in full. Picture: Getty

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But Ms Barton stressed that there were many factors that influenced borrowing capacity and encouraged borrowers to speak to a mortgage broker early on in their home buying journey.  

“Everybody has a different situation, which is why it’s really important to talk to a broker,” she said.  

She said there were a range of government support programs to help first-home buyers get into the property market, such as stamp duty exemptions and home guarantee schemes.  

Why saving for a home deposit has never been harder  

It’s been a challenging time for many home buyers, who have seen mortgage costs, rents and general living costs rise faster than incomes in recent years.  

PropTrack senior economist Paul Ryan said it’s never been harder to save for a home deposit.  

“We’ve got record high home prices, as well as high rents and inflation, so other living expenses are also eating into people’s ability to save,” he said.  

“The only real positive is higher interest rates which can boost your savings, but that’s more than overwhelmed by the higher housing and living costs.” 

Home buyers are finding it increasingly hard to save for a home deposit. Picture: Getty

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Housing affordability in Australia has fallen to its lowest levels in at least three decades, according to the 2023 PropTrack Housing Affordability Index.  

The deterioration in affordability was driven by a dramatic rise in mortgage rates due to the 13 interest rate rises since May 2022, combined with rising home prices over recent years. 

It comes as the national median home price increased 6.6% to $774,000 during the year to April 2024, according to PropTrack’s latest Home Price Index.  

Student loans in the spotlight  

HECS debts and other student loans came under intense scrutiny last year, as high inflation pushed student loan costs to new highs. 

While students and workers don’t have to pay interest on these loans, they are indexed to the Consumer Price Index (CPI), which rose 7.1% last year. 

That prompted the federal government to retroactively change the indexation rate for student loans in this year’s budget, wiping out about $3 billion in student debt.

The federal government wiped out $3 billion in student debt in this year's budget. Picture: Getty

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HECS debts and other government-supported loans are now capped at the lower of the CPI or the Wage Price Index (WPI), so that study loan balances can’t grow faster than wages. 

The debt relief was backdated to all HECS, VET Student Loan, Australian Apprenticeship Support Loan and other student support loan accounts that existed on 1 June 2023.