Should I pay off my debts before I apply for a home loan?

Bayley Clarke · Mortgage broker on the road · Last checked 11 November 2026 · 7 min read

The short answer

Sometimes. It depends which debt, and what the money would otherwise be doing. The rule that surprises people: banks care about limits and repayments, not balances.

A credit card you clear every month still costs you borrowing power. A car loan usually costs far more than a HECS debt the same size. And you rarely need to clear anything before pre-approval, because paying it out can be a condition of formal approval. This guide goes debt by debt, with the full answer on each one linked underneath.

Credit cards: why a $0 balance still costs you

The limit is what counts. A card you clear in full every month is treated the same as one that's maxed out, because on paper you could draw the lot tomorrow. My rule after running these week in, week out: for every $1,000 of limit, times it by five. That's roughly the borrowing capacity it's costing you. A $10,000 card you've never carried a balance on is quietly taking about $50,000 off what a lender will advance. Should you close it before applying? If you don't need it, reducing or closing it usually helps. Full detail in Does my credit card limit affect my borrowing power?

Not sure which debt to clear first?

Send me your debts list on a call and I'll tell you which one to clear first, and what it does to your borrowing in dollars.

Book a 30 minute call Call 0437 189 939

No application, no credit check, nothing on your file. Just the numbers.

Does a car loan affect a home loan? Car loans and novated leases

This is the big one. A car loan's repayment comes straight off what you can afford, so it costs roughly four dollars of borrowing power for every dollar owed. A $21,000 car loan was costing one client about $80,000 of capacity. Same money owing as a HECS debt, roughly ten times the damage: Does a car loan stop me getting a home loan?

Sometimes the fix is a refinance, not a payout. I had a client use some cash to pay the car loan down, then refinance what was left over a fresh term, which cut the repayment and lifted their capacity. Whether the juice is worth the squeeze is a numbers question: Should I refinance my car loan before I apply for a mortgage?

Novated leases aren't a get out of jail free card. The lease repayment is still a commitment, but most lenders will add back pre-tax running costs like fuel, charging, rego and insurance, because they're really living expenses bundled up: Will my EV lease wreck my borrowing capacity?

Does Afterpay affect home loan approval?

Buy now pay later is usually treated like a credit card limit. A $1,000 limit is about $5,000 off your capacity, as a rough measure. One account won't stop you getting a home loan, but a handful running together adds up, and the assessor reads your statements for how you use them: Does Afterpay affect my home loan application?

Should I pay off HECS before buying a house?

Usually not, and this one runs backwards to what people expect. Lenders assess HECS off what you earn, not what you owe, so a $20,000 balance and a $60,000 balance on the same salary cost about the same capacity. Clearing $30,000 bought one client roughly $12,000 of borrowing. Thirty to gain twelve: How much does a HECS debt affect your borrowing power?

The exception is when a lender can exclude the debt once it's gone, often a smaller balance or one that would clear inside about 12 months. Owe $5,000 or $10,000, have a healthy deposit, and if clearing it frees up $50,000 of borrowing, pay 10 to gain 50. I'd take that return: Should I pay off my HECS before I apply, or does it even count?

Clear debts before pre-approval, or before settlement?

You generally don't need to rush around paying debts off just to get pre-approved. We set the application up showing they'll be paid out and closed, and the closure confirmation becomes a condition of formal approval, which only happens after you've signed a contract: Do I have to pay off my debts for pre-approval, or can they be cleared before settlement?

When you do close something, get the paperwork. If it still shows as open on your credit file, or it's the kind of account that never shows at all, like buy now pay later or some car finance, the bank will ask. A closure letter up front is one less question: Do I need closure letters for debts I've already paid off?

Deposit or debts: where the cash does more

It's never a straight yes or no. Sometimes clearing the car loan and the card is what lifts your capacity enough to buy. Sometimes your capacity already covers the place, and the cash does more as deposit, because a bigger deposit can mean less or no mortgage insurance. It's what if I do this, what if I do that, and knowing how each lender treats each version: Should I pay my debts off or keep the money for my deposit?

The one I'll always say no to is going the other way, borrowing a personal loan or putting the deposit on a card. You're paying expensive money to buy cheap money, and the new debt works against the very application it was meant to help: Can I use a personal loan or a credit card for my deposit?

Can I add my car loan to my mortgage? Rolling debts in, and when not to

Often, yes, if the valuation supports it and the total loan stays at or under about 80% of the property's value. Is it dumb to pay a car off over 30 years? On minimum repayments, absolutely. The fix is the snowball: keep paying what the car and card used to cost, just aim it at the home loan: Can I roll my car loan and credit card into the home loan?

The honest part

This is general information, not a plan for your situation. Rolling debts together is a behaviour decision wearing a maths costume, and it only works if the old spending doesn't come back. If debt is already hard to keep up with, talk to someone before you apply for more. The National Debt Helpline (1800 007 007) is free.

Send me your debts list

Car loan, cards, buy now pay later, HECS, the lot. On one call I'll show you what each one is costing your borrowing, which one to clear first, and whether the cash does more as deposit.

Book a 30 minute call Call 0437 189 939

No application, no credit check, nothing on your file. Just the numbers.

Common questions about debts and your home loan

Should I close my credit card before applying for a home loan?+

If you don't need it, reducing or closing it usually helps, because lenders count the limit, not the balance. My rule of thumb: every $1,000 of limit costs roughly $5,000 of borrowing capacity. If you want to keep one for emergencies, shrink the limit rather than keeping the big one.

Does a car loan affect a home loan?+

Yes, and more than most debts. The repayment comes straight off what you can afford, so a car loan can cost roughly four dollars of borrowing capacity for every dollar owed. Sometimes paying it down or refinancing it to a smaller repayment is worth doing before you apply.

Does Afterpay affect home loan approval?+

It's usually treated like a small credit card limit, so a $1,000 limit takes roughly $5,000 off your capacity. One account won't stop a home loan. Several running at once add up, and lenders read your statements for how you use them.

Should I pay off HECS before buying a house?+

Usually not. Lenders assess HECS off your income, not your balance, so paying it off often costs more deposit than it buys back in borrowing. The exception is a small balance some lenders can exclude once it's cleared. Run the numbers both ways first.

Can I add my car loan to my mortgage?+

Often, yes, if the valuation supports it and the total stays at or under about 80% of the property's value. Just keep paying what the car loan used to cost you into the home loan, or you've stretched a five year debt over thirty.

Next question

Why is my borrowing power so low?

The diagnosis side of the same question: the five hidden costs that shrink the number.