HECS · Investing — updated May 2026
Should I pay off HECS or invest? The Australian answer
At 2.4% indexation, the maths almost always favour investing. But if you're buying a home soon, paying HECS first can increase your borrowing capacity by $30–50k. Here's the exact decision framework.
The core question: what is HECS actually costing you?
HECS has no interest rate. Instead, the outstanding balance is indexed annually to CPI (or the Wage Price Index, whichever is lower). In June 2025, that was approximately 2.4%. So the real annual cost of holding a $30,000 HECS debt is around $720/year in indexation.
The question then becomes: can you do better than 2.4% with that money elsewhere? Australian ETFs have historically returned 9–10%/year including dividends. Even a high-interest savings account at 5% beats 2.4% indexation.
Note
The decision framework
HECS indexation is low (≤3%)
InvestInvest the difference
ETFs at ~9–10% return significantly outperforms 2–3% indexation. Invest in a diversified ETF.
HECS indexation is high (≥5%)
Pay HECSConsider voluntary repayment before 1 June
When indexation rivals high-interest savings rates, clearing HECS before it indexes makes sense.
Buying a home in the next 1–2 years
Pay HECSClear HECS first to maximise borrowing capacity
HECS reduces what lenders will lend you. Paying it off can add $30–50k to your borrowing capacity.
Mortgage rate > HECS indexation
Offset accountExtra money into mortgage offset first
At 6.5% mortgage vs 2.4% HECS, offset account savings beat voluntary HECS repayment.
Worked example: $60k income, $30k HECS
At $60,000 taxable income, the mandatory HECS repayment rate is 3.5%, which is $2,100/year. This repayment happens regardless — you can't avoid it through the tax system.
The decision is: should you also make a voluntary extra repayment on top of the mandatory amount? Say you have $3,000 spare. Here's how the numbers compare:
$3,000 — what to do with it?
Voluntary HECS repayment
$72 saved in indexation/yr (2.4% of $3,000)
~$800 total benefit over 10 years
ETF investment (historical avg 9%/yr)
$270 return in year 1
~$7,100 total value after 10 years
Mortgage offset (at 6.5% rate)
$195 interest saved in year 1
~$4,200 total benefit over 10 years
Tip
The mortgage borrowing capacity angle
Lenders apply a serviceability test: they calculate whether you can afford repayments at their assessment rate (usually 3% above the actual rate). Your mandatory HECS repayment reduces your disposable income in this calculation.
At $60,000 income with a $30,000 HECS balance, mandatory repayments are ~$2,100/year. Eliminating this can increase your assessed borrowing capacity by approximately $30,000–$50,000 depending on the lender's methodology. If you're applying for a home loan in the next 12–24 months, this borrowing capacity boost may be worth more to you than the investment returns on that $30,000.
Important
Frequently asked questions
What is the current HECS indexation rate?
In June 2025, HECS indexation was approximately 2.4% — the lower of CPI and the Wage Price Index, following the government's 2023 reforms. This is significantly lower than the 7.1% peak in June 2023. At 2.4%, the real cost of holding HECS debt is low, making investing the mathematically preferred option in most scenarios.
Do ETFs actually return 9–10%/year?
Historically, the Australian share market has returned approximately 9–10% per year including dividends (gross return before tax). Global markets have returned similarly. Past returns don't guarantee future results — markets can have extended periods of poor returns. But over 10–20 year horizons, diversified equity returns have consistently exceeded low-rate debts like HECS. The key risk is needing to sell during a downturn.
How does paying HECS affect my borrowing capacity?
Lenders include your mandatory HECS repayment in their serviceability test. At $60,000 income with a $30,000 HECS balance, you're paying roughly $1,680/year in mandatory repayments. This reduces your annual surplus income available for mortgage servicing. Depending on the lender, eliminating this HECS obligation can increase your borrowing capacity by $30,000–$50,000 — sometimes more at higher income levels.
What if I'm close to paying off my HECS anyway?
If you're within 1–2 years of clearing HECS through mandatory repayments, voluntary repayment makes less sense — the debt will be gone soon regardless. But if you have $40,000+ of HECS and it'll take 5–7 years to repay through the tax system, the compounding maths on investing that lump sum become meaningful.
Can I invest and pay HECS at the same time?
Yes, and this is usually the best approach. Mandatory HECS repayments happen automatically through the tax system — you can't avoid them. The decision is only about voluntary extra repayments vs investing. The answer at current indexation rates is almost always: invest the extra money rather than making voluntary HECS payments.
Are there tax advantages to paying HECS voluntarily?
No. Voluntary HECS repayments are not tax-deductible and do not attract any government bonus. The only financial benefit is reducing the balance before 1 June indexation is applied. Compare this to salary sacrifice into super, which attracts an immediate tax saving at your marginal rate. Super salary sacrifice nearly always beats voluntary HECS repayment from a tax efficiency perspective.