Should I pay off my car loan before applying for a home loan?

If borrowing capacity is the thing holding you back, often yes, because the repayment comes straight off what the bank thinks you can afford. If your capacity already covers the property, the cash may be better in the deposit.

Does paying off debt increase borrowing power?

Yes. Lower outgoings mean a higher borrowing capacity. How much depends on the repayment size and which lender assesses you.

Should I pay off HECS to buy a house?

Sometimes. HECS reduces your take-home pay and therefore your borrowing capacity. Whether clearing it beats keeping the cash depends on the balance and what you're trying to buy.

Is it better to have a bigger deposit or no debts?

It depends on the trade-off. With a guarantor covering the deposit, no debts wins. Without one, a bigger deposit that avoids LMI can be worth more.

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Straight Answers · First home

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

Bayley Clarke · Mortgage broker on the road · Last checked 3 September 2026 · 3 min read

The short answer

It depends on what the trade-off is between having your deposit and having those debts. Sometimes clearing the car loan and the credit card is what lifts your borrowing capacity. Sometimes your capacity already gets you the property and the cash is better in the deposit.

It's not I should or I shouldn't. It's what if I do this, what if I do that, and knowing how the banks will treat each version of your world. I do this all day, playing with those dials.

The two minute version. The rest of this page is the detail underneath it.

Example one: you've got a guarantor

Say you've got access to a guarantor. Because you're using them to satisfy the deposit requirement, there's equity in their property and you can borrow the full amount for what you're looking to buy. You don't need to put down any money for the deposit. Your deposit can theoretically be zero.

In that situation you may have other debts. Car loans, personal loans, HECS, credit cards. We may look to pay those off so your borrowing capacity improves, because your outgoings are less. A $600 a month car loan can be worth $60k to $80k of borrowing capacity. The cash does more work killing the debt than sitting in a deposit you don't need.

Example two: your capacity already covers it

On the flip side, sometimes what you're looking to buy means it doesn't matter that you have these other debts, because your borrowing capacity is enough to get into the style of property you're after.

At that point your deposit is better used towards the property, not towards paying off the debt. A bigger deposit there means a smaller loan, a lower LVR and maybe no lenders mortgage insurance, which is worth more than clearing a debt you can comfortably service.

Why it's never a straight yes or no

These are scenario conversations. It's a matter of talking through what your world looks like and playing around with all the different dials to figure out the most suitable outcome for what you're trying to do.

So it's not just a matter of I should or I shouldn't. It's what if I do this? What if I do that? And it's knowing how paying off debt versus having it as a deposit impacts your financial world and how the banks will ultimately treat you. That's the important part.

The honest bit: the credit card is the exception

Even when you keep the cash, look at the card limit. The banks assess a credit card on its limit, not the balance, and every $1,000 of limit knocks roughly $5,000 off what you can borrow. Cutting the limit costs you nothing and it's usually the first dial I turn.

Everything else is a trade-off. That one's just free.

Want the dials turned on your numbers?

A 30 minute call. We run pay-it-off against keep-it, with your actual debts and deposit, and I tell you which version the banks like better.

Book a 30 minute call Call 0437 189 939

No cost to you, ever. The bank pays me when a loan settles. · How I get paid

Next question

If I have a bigger deposit, does that change how much the bank will lend me?

Before you pour cash into the deposit, know what it does and doesn't move.