Should you clear debts before applying for a home loan?
Clearing a debt removes it from a lender's assessment but uses cash you might need. The trade-offs to weigh — including credit cards — no verdict.
Should you clear debts before applying for a home loan?
There’s no single right answer here — it depends on your situation, and two people with the same balance sheet could reasonably make different calls. Clearing a debt removes a commitment from a lender’s assessment of what you can afford to repay. But clearing it uses cash that might otherwise sit in your deposit, cover settlement costs, or act as a buffer. Here’s how to weigh the trade-off rather than a rule to follow.
What actually changes if you pay off a debt before applying?
Two things move in opposite directions:
- What a lender sees. A debt you’ve paid off and closed is no longer an ongoing repayment commitment weighed against your income in a serviceability assessment. Our guide to how banks calculate borrowing capacity covers how existing commitments fit into that assessment generally, including the interest-rate buffer APRA’s guidance directs lenders to apply to existing debts as well as a new loan — as at July 2026, that buffer sits at a minimum of 3.0 percentage points under APS 220 (relayed through APG 223).
- What’s in your bank account. The cash you use to clear the debt is no longer available. If it comes out of savings you were counting as part of your deposit, or as a buffer for settlement costs and the unexpected, you’ve traded a lender-side commitment for a reader-side shortfall.
Neither side of that trade is obviously bigger. Someone with a small debt and a large cash buffer loses very little by clearing it; someone close to their minimum deposit, or still building a genuine-savings history, may lose more by drawing cash down than they gain on the lender’s side of the ledger.
Should I close my credit cards before applying for pre-approval?
The same trade-off applies to a credit card, with one extra wrinkle: what a lender actually assesses. How much weight a card’s limit gets — the full approved limit or just the drawn balance — is set by each lender’s own policy and varies between institutions; confirm the specifics with your lender or a mortgage broker rather than assuming one treatment applies everywhere. Either way, a card’s approved limit is a factor a lender is likely to look at in some form, alongside how the card is actually used.
Closing a card removes that limit from consideration entirely — but it also removes credit you may be relying on as a buffer for emergencies, or that forms part of your day-to-day cash flow if you pay it off in full each month. If the card carries a balance, paying it down (or off) removes a repayment commitment the same way clearing any other debt does.
Some situations make neither option obviously better: a card that’s rarely used and easily replaced is a lower-stakes decision than a card that’s central to how someone manages irregular income or short-term expenses. There’s no verdict this article can give that applies to every reader.
Weighing it up
| Option | What you gain | What you give up |
|---|---|---|
| Clear the debt / close the card | Removes a commitment/limit from the lender’s assessment | Cash for deposit, buffer, settlement or spare credit |
| Keep the debt / keep the card open | Cash and available credit stay accessible | Stays part of the lender’s assessment |
Neither row is the “right” one in general — it depends on how much cash you have relative to your deposit target, how close you are to applying, and how a specific lender treats the debt or the card. A mortgage broker who works across multiple lenders can model both scenarios against your actual numbers and a specific lender’s policy — a better basis for the decision than a general rule.
If the debt in question is a HECS-HELP balance specifically, it behaves differently again — our guide to how HECS-HELP debt affects borrowing capacity explains why paying it down isn’t quite the same trade-off as clearing a personal loan or a credit card.
