When a bank assesses a home loan, it works out your surplus income after living costs and existing commitments. A HECS debt counts as a commitment: the lender deducts your compulsory repayment from the income it uses. Because that repayment rises with your income under the marginal system, higher earners feel it most.
For example, someone on a $100,000 repayment income has a compulsory HECS repayment of about $4,570 for 2026-27. A lender effectively assesses them as if they earned roughly that much less — which, run through a serviceability calculation, can trim the maximum loan by tens of thousands of dollars.
Small balance: if you can clear the debt entirely, the compulsory repayment disappears from your assessed commitments and your borrowing capacity can rise. This is the case where paying it off shortly before applying often makes sense.
Large balance: partially paying down a big debt doesn't remove the repayment (you'll still owe it next year), so it does little for serviceability. Here the cash may be better kept for your deposit.
Every lender uses its own serviceability model, so the exact impact varies. A mortgage broker can show you the difference with and without the HECS repayment for a specific lender.
Purely on returns, investing often beats paying off HECS because the debt only grows with low indexation, not interest. But borrowing capacity is the common exception: if a home purchase is near, the serviceability gain from clearing a small HECS balance can outweigh the investment maths. Decide with both effects in view.