Do I need to pay off my car loan before getting pre-approval?

Generally no. The pre-approval can be assessed as if the debt is gone, with paying it out and closing it as a condition of formal approval.

When do I have to pay off debts for a home loan?

Usually after you've signed a contract and before formal approval or settlement, depending on how the condition is written. The bank will want proof it's closed.

What is a closure letter?

A letter from the lender confirming the account is paid out and closed with a zero balance. Banks use it to tick off the condition that a debt has been cleared.

Is paying down a credit card the same as closing it?

No. Banks generally count the full limit of an open credit card, even with a zero balance. To remove it from your assessment, it needs to be closed.

Do I need extra savings to pay off debts as a condition?

Yes. The money to clear the debts needs to be there on top of your deposit and costs.

Home / Straight Answers / Paying off debts for pre-approval

Straight Answers · First home

Do I have to pay off my debts for pre-approval, or can they be cleared before settlement?

Bayley Clarke · Mortgage broker on the road · Last checked 11 November 2026 · 2 min read

The short answer

Generally, no. We can still do a pre-approval, structured on the basis that those debts are going to be paid out and closed. You don't need to rush around paying them off before you've even found a property.

The way it works is we put it on the application as a condition. Once you've signed a contract and we go for full approval, you clear the debts, we give the bank a closure confirmation, and that ticks off the condition.

The 60 second version, filmed from the driver's seat. The rest of this page is the detail underneath it.

Why people ask

Sometimes I'll have a chat with someone who's got a few debts sitting in the background, a car loan, a personal loan, a credit card. We run the numbers and it's clear they're a lot stronger with those debts gone, and they're in a position to pay them off. But they haven't found a property yet, and they're not sure, do they need to pay them off now?

It's a fair question, because paying out a debt is a one way door. Once that cash is gone, it's gone. If the property search drags on, or something comes up, you might wish you'd held on to it a bit longer.

How the condition works

So what happens is the pre-approval gets assessed as if those debts are already gone, and the bank notes that they need to be paid out and closed before the loan goes ahead. That means your borrowing power reflects the cleaner position from day one, even though the debts are still technically there.

Then once you've signed a contract and the application goes to formal approval, that's when it gets tidied up. You pay out the debt, ask the lender for a closure letter confirming the account is closed with a zero balance, and we hand that to the bank. Paying it down isn't enough on its own, particularly with credit cards, because if the limit's still open the bank still counts it. It needs to be closed.

The honest bit: the cash still has to be there

Pushing the payout to later doesn't make the money appear. The cash to clear those debts needs to be there on top of your deposit and buying costs, and the bank will want to see it in your account.

So when we set this up, we're counting it as money already spent. If clearing the debts would leave you short on the deposit, that's a different conversation, and sometimes keeping the cash for the deposit is the smarter move.

Not sure whether to clear your debts first?

A 30 minute call. We go through what you owe, what you've saved, and run your borrowing power both ways so you can see what clearing them actually does.

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Next question

Should I pay my debts off or keep the money for my deposit?

It depends on the trade-off. With a guarantor, clearing debts lifts capacity.