You are saving for a home, but you also have a car loan, personal loan, credit card or other debt. Which should come first?
You’re saving for a home deposit, but you also have a car loan, personal loan, credit card or other debt.
Then comes the difficult question: Should you use your savings to pay off debt, or keep saving for a bigger home deposit?
For many New Zealand home buyers, especially first home buyers, the answer isn’t as simple as choosing whichever has the highest interest rate.
Your deposit matters. But so does your ability to comfortably service a mortgage.
Sometimes reducing debt may put you in a stronger borrowing position. In other situations, keeping more money available for your deposit may be more important.
The right answer depends on your individual financial position and the lender assessing your application.
Why Your Deposit Matters
Your deposit is an important part of a home loan application.
A larger deposit generally means you need to borrow less relative to the property’s value.
Example:
On a $700,000 property, a $70,000 deposit means approximately $630,000 in lending. A $140,000 deposit means approximately $560,000 in lending.
The size of your deposit can affect your loan-to-value ratio (LVR), the amount you need to borrow and potentially the lending options available to you.
So naturally, many buyers concentrate on building the biggest deposit possible. But deposit size is only one part of the assessment.
Why Existing Debt Matters Too
When a lender considers your home loan application, it also looks at your existing financial commitments.
- Car finance
- Personal loans
- Credit cards
- Buy Now Pay Later facilities
- Student loan obligations
- Store finance
- Other existing lending
The important point is that a relatively small debt can sometimes create a meaningful regular repayment commitment.
Imagine you have $15,000 remaining on a vehicle loan. Compared with a mortgage of several hundred thousand dollars, $15,000 may not look significant. But if that vehicle loan requires several hundred dollars in repayments each month, those repayments reduce the income available to service your proposed home loan.
Bigger Deposit vs Lower Debt
Consider two simplified options.
You have $100,000 available and also have a $20,000 personal loan.
Option A — Keep the Full DepositYou keep the full $100,000 for your property deposit, but the personal loan repayment remains in your servicing assessment.
Option B — Repay the DebtYou use $20,000 to clear the personal loan and retain $80,000 toward your deposit, removing that repayment commitment.
Which option is better? There isn’t enough information to answer yet.
We would need to know the property price, your income, other commitments, living expenses, remaining deposit, proposed LVR, lender criteria and several other factors.
When Paying Off Debt May Help
Reducing or clearing debt may be worth considering when the associated repayments are having a significant effect on your borrowing capacity.
If paying off one of those debts removes a significant monthly commitment without reducing the home deposit too much, it may potentially strengthen the applicant’s position.
But this should be assessed before making the payment.
When Keeping a Bigger Deposit May Be More Important
There are also circumstances where preserving your deposit could be more valuable.
Using too much of your savings to clear debt could leave you with an insufficient deposit for the property you’re hoping to purchase.
Your deposit can influence your required loan amount, LVR, the lenders or lending options available to you, whether low-deposit lending requirements apply, and your financial buffer after settlement.
Don’t Forget About Credit Cards
You may have a $0 balance but still have a large available credit limit.
Depending on the lender’s assessment method, that available limit may still be relevant when calculating your commitments.
Example:
Credit card balance: $0
Credit card limit: $15,000
You might reasonably think, “I don’t owe anything on it.” But from a home loan assessment perspective, the available credit facility may still need to be considered.
The Lender Looks at the Whole Picture
A lender does not just see the size of your deposit. It may also consider income, existing debt, credit limits, regular expenses, dependants, proposed mortgage repayments and other commitments.
This is why a strong-looking deposit does not automatically mean you are in the strongest possible borrowing position.
What About Car Finance?
Car finance is another common issue for first home buyers.
You may need the vehicle for work and everyday life, so selling it simply to improve a mortgage application may not be practical. However, the regular repayment can still affect servicing.
Suppose you have only $12,000 remaining on your car finance but you’re paying $500 each month. The more useful question is not just “Is $12,000 a big debt?” but “How is the $500 monthly commitment affecting my home loan position?”
Should You Use Your Entire Savings to Clear Debt?
Usually, this decision deserves more consideration than simply transferring the money immediately.
Illustrative position:
Savings: $85,000
Car loan: $15,000
Credit card: $5,000
Target property: $650,000
You could potentially clear $20,000 of debt, but your available savings would then fall to $65,000. That could materially change your deposit percentage and the type of lending you require.
Alternatively, keeping all $85,000 preserves your deposit but leaves the existing commitments in place.
There may also be a middle ground — for example, reducing a particular commitment while preserving enough deposit for the intended purchase.
Your Financial Buffer Matters Too
A home deposit isn’t necessarily the only reason to retain some savings.
After buying a home, unexpected expenses can arise. Repairs, moving costs, insurance, rates, appliances and other household expenses can quickly add up.
Putting every dollar into the deposit — or using every dollar to repay debt — can leave you with very little flexibility after settlement.
A Bigger Deposit Doesn’t Automatically Mean You Can Borrow More
Your deposit and your borrowing capacity are related, but they are not the same thing.
A larger deposit reduces the amount you need to borrow. Your borrowing capacity, however, also depends on whether the lender believes you can afford the proposed loan.
- Income
- Existing debts
- Credit limits
- Regular expenses
- Dependants
- Proposed mortgage repayments
- Interest-rate servicing assumptions
- Other financial commitments
So, Which Debt Should You Pay First?
There isn’t a universal order that works for every home buyer.
Instead, look at each commitment individually: how much is outstanding, what is the required repayment, how long is left, what would it cost to clear, would clearing it materially improve servicing, and what would paying it off do to your available deposit?
Before You Move Your Savings, Run the Numbers
If you’re preparing to apply for a home loan, don’t assume you need to clear every debt first. And don’t automatically assume keeping every dollar for the biggest possible deposit is the best strategy either.
Scenario 1Keep the debt + larger deposit
Scenario 2Clear the debt + smaller deposit
Scenario 3Reduce selected commitments + retain part of the deposit
How Mortgage Advisors Can Help
At Mortgage Advisors, we can look at your deposit, income, existing debts and regular commitments together before deciding which approach may be appropriate.
Rather than changing your finances based on assumptions, we can help you understand how different scenarios may affect your home loan application and explore lending options suited to your circumstances.
This can be particularly useful for first home buyers who are trying to balance saving a deposit while managing existing car finance, credit cards or personal loans.
Pay Debt or Build Your Deposit? Check Before You Decide.
Sometimes a larger deposit creates the stronger position. Sometimes removing a monthly debt repayment makes a bigger difference. The answer depends on the numbers.Talk to Mortgage Advisors
027 703 0000
Frequently Asked Questions
Is it better to pay off debt before applying for a mortgage?
It depends. Clearing a debt may reduce your regular commitments and potentially improve servicing, but it may also reduce your available deposit. Both effects need to be considered.
Should first home buyers be debt-free before applying?
Not necessarily. Having existing debt does not automatically prevent you from obtaining a home loan. The lender will assess your overall financial position and ability to service the proposed lending.
Does car finance affect how much I can borrow?
It can. Regular car loan repayments are an existing financial commitment and may affect the amount available for mortgage servicing.
Should I use my deposit savings to pay off my car loan?
Don’t assume this is automatically the best option. Paying off the car loan may improve servicing, but reducing your deposit can create a different issue. Comparing both scenarios first can help.
Can a credit card affect my mortgage if I don’t owe anything?
Potentially. Some lenders may consider the available credit limit as part of their assessment even if the current balance is $0.
Is a 20% deposit always required?
Not necessarily. Home loan options can exist at different LVR levels, subject to lender criteria, restrictions and individual circumstances.
Should I keep some savings after buying my home?
Having an appropriate financial buffer can be valuable because home ownership can bring unexpected costs. The amount suitable for you will depend on your circumstances.
