We Told a Client to Stop Paying Off Their HECS Debt. Here's Why.

11 Aug

Most people assume HECS debt and home loans mix about as well as oil and a mortgage application. You've got a HECS balance, so obviously it's working against you, right?

‍ Not always. And we've got a client story that proves it.

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The Bank Wanted $70,000 Gone Before They'd Budge

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A young family, two kids, came to us mid-build. They'd bought their block, signed the construction contract, and had loan approval sitting with one of the major banks. All good, except for one condition buried in the fine print.

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The bank wanted their entire HECS-HELP debt cleared first. Not reduced. Cleared. All roughly $70,000 of it. And it was a last minute request. One the clients were not expecting. Through every conversation, not a mention of cleared out HECS.

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Since the bank couldn't process that kind of transfer in one go, the clients had already started chipping away at it in $10,000 chunks. By the time they landed in our office, they were down to about $30,000 left and gearing up to finish the job.

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We asked them to stop. Wait, don't send the next payment.

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Why We Hit Pause

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Here's the bit most people get wrong about HECS debt and borrowing. It's not that having HECS makes you unlendable. It's that every lender treats it differently when they run the numbers on what you can afford.

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Some lenders factor in your compulsory HECS repayments as an ongoing commitment and adjust your borrowing power accordingly. Others take a different view entirely. Same debt, same borrower, different outcome depending on whose spreadsheet you land on.

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That first bank had a policy of wanting HECS gone before they'd proceed. Fine, that's their call. But it's not the only call in the market, and it definitely wasn't the best one for this family. These guys were First Home Buyers and needed to have a savings buffer as one parent was on maternity leave. The last minute requirement left them in a pickle. Keep going with their home build, stop and wait until they went back to work or just go ahead and drain every dollar they had.

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What We Actually Did

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Instead of accepting one lender's rulebook as gospel, we went looking at the whole picture. Income, dependants, the remaining HECS balance, savings, construction costs, land value, the lot.

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We found a lender who didn't require the debt to be wiped out before settling. Suddenly the clients weren't burning through their last $30,000 in savings just to satisfy a policy that wasn't actually necessary.

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And the win didn't stop there. The original loan was sitting at roughly 91% LVR. The new structure brought that down to around 89%. Doesn't sound like much until you realise it dropped their Lenders Mortgage Insurance by an estimated $20,000. On top of that, their rate moved from 7.49% down into the low 6% range.

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So to recap, same clients, same income, same HECS debt. They kept their savings, kept their HECS balance intact, dropped their LVR, saved roughly $20,000 in LMI, and landed a noticeably better rate. All because someone looked past the first "no" and asked a second lender the same question.

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Does HECS-HELP Actually Affect Your Borrowing Power?

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It can. Lenders generally look at your existing financial commitments when working out what you can service, and compulsory HECS repayments fall into that bucket for most of them.

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But that's a long way from "you can't borrow with HECS debt," which is the message a lot of first home buyers walk around believing. It's also a long way from "my bank told me to pay it off, so I have to." Neither of those is automatically true. It depends entirely on which lender you're sitting in front of.

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So Should You Pay Off HECS Before Buying?

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Not automatically, no. Clearing debt feels productive, we get it. But if clearing your HECS balance means gutting your savings to do it, you might be trading one problem for a worse one.

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Buying your first home, especially building one, comes with a steady stream of costs nobody warns you about. Turning up to settlement with barely a dollar left in the account isn't a great position to start from, no matter how clean your debt profile looks on paper.

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The Real Lesson Here

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This wasn't a story about a good bank and a bad bank. Both lenders were doing exactly what their policy told them to do. The difference was that one policy suited this family's situation, and one didn't.

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Same clients. Same income. Same HECS debt. Two completely different outcomes depending purely on which lender's rules applied.

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That's the whole argument for shopping your loan around properly instead of taking the first "here's what you need to do" at face value.

If you're weighing up your options, we cover a fair bit of ground beyond home loans for first buyers. Whether you're buying your next home , looking at an investment loan , thinking about refinancing , self-employed and chasing a low doc option , running a business that needs commercial lending , or setting up an SMSF loan , we've got you covered either way.

Not sure which one applies to you? That's exactly what we're here for. Make an Appointmen t or Meet the Tea m and we'll point you in the right direction.

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Got HECS-HELP Debt and Thinking About Buying Your First Home?

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Don't assume you need to clear it before you apply. Different lenders, different policies, different results. We'll run through what's actually available for your situation.

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Make an Appointment | Meet the Team

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