HECS-HELP Debt and Borrowing Capacity Reduction 2026

Introduction

The interaction between Higher Education Contribution Scheme–Higher Education Loan Programme (HECS-HELP) debt and residential mortgage borrowing capacity will shift materially in 2026. The Australian Government has legislated a new indexation formula, applying the lower of the Consumer Price Index (CPI) and the Wage Price Index (WPI) to HELP balances, backdated to 1 June 2023. While the reform moderates future debt escalation, the compulsory repayment framework—which drags on serviceable income—remains unchanged. For mortgage applicants carrying a HELP balance, the net effect in 2026 will depend on three variables: the indexed balance of the debt, the repayment rate applied to their HELP repayment income (HRI), and the treatment that an authorised deposit-taking institution (ADI) adopts when assessing the loan. This article examines each component, cites primary sources, and outlines the practical consequences for borrowing capacity in the 2026 calendar year. Information only, not personal financial advice. Consult a licensed mortgage broker.

How HECS-HELP Debt Compresses Borrowing Capacity

An outstanding HECS-HELP balance reduces borrowing capacity through two distinct channels: a liability effect and an income effect. Neither channel is optional under current prudential guidance.

Under the Australian Prudential Regulation Authority’s (APRA) Prudential Practice Guide APG 223 Residential Mortgage Lending, an ADI must identify all known financial commitments of an applicant and incorporate them into the serviceability assessment (APRA, APG 223, paragraphs 40–44). A HELP debt represents a non-discretionary future obligation. The liability channel treats the balance as a contingent claim on future income, which many lenders internalise by applying a haircut to the applicant’s net asset position or by deducting the entire outstanding amount from usable deposit funds when calculating loan-to-value ratio (LVR). The income channel is more direct: compulsory HELP repayments are withheld through the Pay As You Go (PAYG) system or assessed via the tax return, reducing the net income that can be directed toward mortgage service. Lenders use the repayment amount—anchored to the HELP repayment income and the legislated repayment rates—to lower the applicant’s effective income in their serviceability calculator.

The combined effect can be pronounced. A single applicant earning $90,000 in the 2025–26 income year with a HELP debt of $45,000 would face a compulsory repayment of 6.5% of HRI, equating to $5,850 per annum or approximately $487 per month. A dual-income couple where each partner earns $80,000 and holds a $35,000 HELP debt would see a combined monthly deduction near $700. When lenders apply a serviceability buffer—typically 3 percentage points above the prevailing standard variable rate—that $700 monthly reduction can translate into a borrowing capacity contraction of $100,000 to $140,000, depending on the lender’s exact model.

The 2023 Indexation Spike and Its Legacy

On 1 June 2023, the HELP indexation rate jumped to 7.1%, the highest figure since the early 1990s. The rate was tied to the CPI for the March quarter, reflecting broader inflationary pressure. For a borrower with a $40,000 HELP balance, 7.1% indexation added $2,840 to the debt, pushing it to $42,840 before any compulsory or voluntary repayments were credited. That single-year adjustment increased the future repayment stream and, because it occurred before the legislative amendment, remains embedded in the account balance.

The legacy of the 2023 spike will flow into 2026 borrowing assessments in two ways. First, the carrying balance is permanently higher than it would have been under a WPI-linked regime. Second, the elevated balance extends the repayment horizon, keeping the compulsory repayment obligation in place for more income years. A borrower whose debt would have been extinguished by 2027 may now carry the debt into 2029, subjecting them to continuing income deductions throughout the mortgage life. Approved mortgage insurers, such as Helia and QBE, also require disclosure of HELP liabilities, and a prolonged repayment timeline can affect their willingness to underwrite high-LVR loans.

Source: ATO, HELP and TSL indexation rates (ato.gov.au).

New Indexation Rules from 2025 and the 2026 Effect

The Treasury Laws Amendment (Indexation of Higher Education Loans) Act 2023 altered the indexation mechanism. From 1 June 2025 (with retrospective application to 1 June 2023 and 1 June 2024), the HELP indexation factor is the lower of the CPI and the WPI. The Australian Bureau of Statistics (ABS) reported that the WPI grew by 4.2% through the year to December 2023, materially below the corresponding CPI figure. If that relationship holds, the 1 June 2025 indexation will likely be based on the WPI, potentially in the 3.5%–4.0% range. The 1 June 2026 indexation will similarly be governed by the lower-of rule.

For borrowing capacity in 2026, the significance is two-fold. The new formula slows the compounding growth of HELP balances, which limits the expansion of the liability leg. Critically, the ATO will recalculate indexation for the 2023 and 2024 years once the legislation is applied, generating a credit that is applied to the account. The credit reduces the outstanding balance, shortening the remaining repayment period and diminishing the total compulsory repayment quantum that lenders must account for. The reduction will be visible on a borrower’s ATO statement during the 2025–26 financial year, exactly when many pre-approval applications will be assessed.

It is essential to recognise that the indexation reform does not alter the repayment income thresholds or the repayment rates. The ATO’s HELP repayment thresholds and rates 2025–26, once published, will continue to start at $54,435 (estimated following indexation from the 2024–25 threshold of $51,550). The rate scale runs from 1% at the threshold up to 10% for HRI above $151,201. Therefore, the income deduction stream for a given HRI remains unchanged; the reform only moderates how rapidly the residual balance inflates.

Source: Treasury, Better and fairer indexation for student loans (treasury.gov.au); ABS, Wage Price Index, Australia (abs.gov.au).

Lender Assessment Practices for HELP Debt

ADIs do not apply uniform treatment to HELP obligations. The variation can produce materially different borrowing capacity outcomes. APRA’s APG 223 states that lenders must consider “all relevant liabilities” but does not prescribe a formula, permitting each institution to design its own credit policy within the overall serviceability framework.

The most common approach is to treat the annual compulsory HELP repayment as a dollar-for-dollar reduction in the applicant’s after-tax income. For example, if an applicant’s declared gross income is $100,000, the lender calculates a net income figure after tax and the Medicare levy, then subtracts the HELP repayment derived from the ATO’s rate table based on the applicant’s HRI. A minority of lenders apply a more conservative method, treating the full HELP balance as a contingent liability and deducting a fixed notional amount (e.g., 2% of the balance per annum) regardless of the statutory repayment rate. This can be more punitive when the balance is large but the HRI is moderate.

Lenders also differ in how they capture dual-income scenarios. Some aggregate household HELP repayments, while others allow each applicant’s repayment to be calculated independently and deducted from their respective income share. With the indexation credit coming through in 2025–26, borrowers who apply for a mortgage in early 2026 should obtain an updated HELP account statement from the ATO and present it during the application process. The updated balance and projected repayment may yield a higher borrowing capacity than a stale 2024 statement would indicate.

Strategies for Borrowers Carrying a HELP Balance in 2026

Mortgage applicants can take several steps to optimise their borrowing position in the 2026 assessment environment. None eliminates the HELP deduction completely, but each can reduce its impact.

Obtain and lodge the updated ATO statement. The ATO will apply the retrospective indexation credit during the 2025–26 financial year. An applicant who presents a statement reflecting the adjusted balance will ensure the lender’s calculator uses the lowest possible outstanding debt and the most accurate repayment figure.

Consider voluntary repayments with care. A voluntary repayment made before indexation on 1 June 2026 reduces the balance that will be indexed and may extinguish the debt earlier, eliminating the compulsory repayment liability. However, funds used for a voluntary repayment cannot simultaneously serve as a deposit. The trade-off between deposit size and ongoing serviceability should be modelled with a mortgage broker. Where the principal constraint is serviceability rather than deposit adequacy, shifting $10,000–$15,000 into the HELP account may unlock a larger loan quantum than keeping those funds in a savings account.

Align the repayment cycle with income reporting. Self-employed applicants who pay HELP via their tax assessment often have a lump-sum obligation. Lenders may annualise the lump sum and deduct one-twelfth from monthly income, but the treatment varies. Providing evidence of a regular voluntary payment plan aligned with the PAYG instalment system can smooth the deduction and avoid the appearance of a large contingent liability.

Select a lender whose credit policy is favourable to HELP borrowers. Because ADI policies diverge, an experienced mortgage broker can direct an applicant toward an institution that isolates the statutory repayment amount rather than applying a notional deduction. The difference in assessed capacity can exceed $50,000 for a typical graduate borrower.

Regulatory Outlook and the 2026 Capacity Floor

APRA’s Prudential Standard APS 220 Credit Quality and the companion guide APG 223 continue to frame residential mortgage lending. As of early 2025, APRA has not signalled any relaxation of the serviceability buffer, which remains at 3 percentage points above the product rate. The buffer acts as a multiplier of the HELP deduction. Every dollar of HELP repayment removed from income is stressed at the product rate plus 300 basis points, amplifying the borrowing capacity reduction.

The government’s Universities Accord final report and the 2024–25 Budget included measures beyond indexation reform, such as changes to the repayment threshold and the possible introduction of a new HELP repayment system tied to marginal income. None of those measures had been legislated at the time of writing. Should the threshold be lifted further, lower-income graduates could drop below the repayment floor, temporarily removing the serviceability drag. However, for the 2026 calendar year, such changes remain prospective. Borrowers should base their plans on the legislated framework: a statutory repayment obligation for incomes above approximately $54,000, indexed annually by CPI, and an indexation rate that follows the lower-of rule. Any departure from that baseline would require new primary legislation.

Conclusion

HECS-HELP debt remains a material input in Australian mortgage underwriting. In 2026, the combined effect of the new indexation formula—and the associated retrospective credit—will modestly shrink outstanding balances and, in some cases, shorten repayment timelines, providing a marginal improvement in assessed borrowing capacity compared to 2024. Nevertheless, the compulsory repayment mechanism continues to extract a predictable slice of income that every ADI must capture under APRA’s serviceability framework. The precise impact turns on the applicant’s HRI, the balance of the HELP account, and the specific credit policy of the chosen lender. Engaging with a licensed mortgage broker who can navigate these variables and present a current ATO statement will be critical for any borrower seeking to maximise their loan quantum in the 2026 market.

Information only, not personal financial advice. Consult a licensed mortgage broker.