Deciding whether to pay off debt or save for a house deposit is one of the most common financial questions Australians face before buying property. The answer depends on the type of debt, its interest rate, the amount, and how lenders treat it in their serviceability assessment.
The Short Answer
Generally, pay off high-interest consumer debt first. Credit cards and personal loans at 15–25% are very expensive — every $10,000 of credit card debt costs $1,500–$2,500/year in interest. You can’t generate a comparable risk-free return from a savings account or deposit.
But keep saving simultaneously. Waiting until all debt is gone before starting to save for a deposit can cost you years — especially in a rising property market.
HECS is different — it grows at CPI, which is typically lower than mortgage rates. HECS has a different calculation that requires comparing the serviceability impact against the mortgage interest saved.
How Lenders Treat Different Debts
Understanding how lenders assess your debts is key — because debt affects more than your budget. It directly reduces how much you can borrow.
| Debt type | How lenders assess it | Impact on borrowing power |
|---|---|---|
| Credit card | 3% of total limit per month (regardless of balance) | High — a $10,000 limit costs ~$300/month in assessment |
| Personal loan | Actual monthly repayment | Moderate — direct deduction from NSR |
| Car finance | Actual monthly repayment | Moderate |
| Buy-now-pay-later | Varies — some lenders count, some don’t | Low to moderate |
| HECS-HELP | Actual ATO compulsory repayment rate × income | Moderate to high depending on income |
| Guarantor obligations | Treated as contingent liability | Varies |
The credit card limit rule is critical: Lenders assess credit card limits as if they were fully drawn, repaid at 3% per month. A $15,000 credit limit = $450/month in assessed commitments — regardless of whether you carry a balance. Closing unused cards immediately improves your borrowing power without any other change.
The Mathematics: Pay Off Debt vs Save the Deposit
Scenario A: $10,000 Credit Card Balance at 20% Interest
If you owe $10,000 on a credit card at 20% p.a. and are making minimum repayments (~$200/month):
- Annual interest cost: ~$1,800–$2,000
- Borrowing power reduction (3% of $10,000 limit): ~$300/month = ~$36,000 reduction in how much you can borrow
Paying this off in full:
- Saves ~$1,800–$2,000/year in interest
- Adds ~$36,000 in borrowing power
- Increases your monthly cash flow by ~$200/month (available for saving)
Verdict: Paying off a credit card balance first is almost always the right call before saving additional deposit.
Scenario B: $25,000 Car Loan at 8% Interest
Monthly repayment: ~$500/month. Remaining term: 3 years.
Impact on borrowing power: ~$500 × 4.5 (lender multiplier) = ~$40,000–$50,000 reduction in max borrowing.
You have $25,000 in savings. Should you pay off the car loan or put it toward the deposit?
| Option | Impact |
|---|---|
| Pay off car loan | Gain ~$40,000–$50,000 borrowing power; save ~$1,500–$2,000 in remaining interest; free up $500/month |
| Keep as deposit contribution | Deposit grows toward 10–20% of purchase price |
Verdict: Depends on timing. If you’re applying for a loan within 6–12 months, clearing the car loan likely gains you more in borrowing power than the extra deposit contributes. If buying is 2+ years away, saving the deposit while making extra repayments on the car loan may be more balanced.
Scenario C: $35,000 HECS-HELP Debt (Income: $90,000)
Annual compulsory repayment: 6.0% × $90,000 = $5,400/year = $450/month
Lender impact: ~$450/month = ~$55,000–$70,000 reduction in borrowing power.
HECS interest rate = CPI (approximately 3.5–4.5% in recent years, indexed annually). Mortgage rate = ~6%.
If you pay off the $35,000 HECS:
- Gain ~$55,000–$70,000 in borrowing power
- Lose the $35,000 from your deposit fund
- Avoid HECS indexation (~$1,400–$1,600/year on $35,000 at 4%)
- Lose the equivalent mortgage interest savings on a $35,000 larger deposit: $35,000 × 6% = $2,100/year
Net position: Paying HECS frees $450/month in serviceability, worth approximately $55,000–$70,000 more in borrowing power. But you lose $35,000 from your deposit. The net effect on your maximum purchase price is approximately +$20,000–$35,000 after replacing the deposit impact.
Verdict: If your remaining HECS balance is small (under $20,000–$30,000), paying it off before applying is often worthwhile. For larger HECS balances, the opportunity cost is higher — keep saving the deposit and let the ATO collect HECS via tax.
A Practical Decision Framework
Step 1: Close all unused credit card accounts now
This is free, fast, and immediately improves your borrowing power. Cancel cards you don’t need. Keep only one or two with modest limits ($2,000–$5,000).
Step 2: Pay down consumer debt aggressively
Any debt at 10%+ interest (credit cards, personal loans, BNPL) should be cleared before building a house deposit. The guaranteed return is higher than any bank savings rate.
Step 3: Continue contributing to the deposit alongside debt repayment
Don’t stop saving entirely. Even $200–$500/month going into a HFSS account while you clear debt keeps you moving forward. Time in the market also applies to savings.
Step 4: Model the HECS decision closer to purchase
Run the numbers (or ask a broker to) when you’re 6–12 months from applying. At that point, the serviceability gain vs deposit cost trade-off becomes concrete.
Step 5: Apply when debt is cleared and deposit is ready
Once consumer debt is zero and you have your deposit (plus costs), apply. Don’t over-save — once you pass the serviceability test with comfortable buffer, additional delay has a cost in a rising market.
FAQ
Can I get a mortgage if I have debt?
Yes — having debt doesn’t automatically disqualify you from a home loan. Lenders assess whether your income is sufficient to service the mortgage repayments after all other commitments. The key is that your debt reduces your borrowing capacity, not that it prevents lending entirely.
Does HECS affect my ability to get a mortgage?
Yes. Lenders count your compulsory HECS repayment (from the ATO’s repayment table) as a monthly commitment, reducing your borrowing power. At $90,000 income, this reduces borrowing by approximately $55,000–$70,000. See our HECS and home loans guide for the full analysis.
Should I use my savings to pay off debt or put it toward a deposit?
For high-interest consumer debt (credit cards, personal loans at 10%+), pay it off first. For car loans at 6–8%, model the impact on borrowing power. For HECS, compare your remaining balance against the borrowing power gain — it’s a nuanced calculation.
For advice tailored to your situation, speak with a licensed mortgage broker or financial adviser. Find one through MoneySmart or the ASIC financial advisers register.