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Should you pay off debt first or save for a deposit?

Looking to buy your first home? It’s important to make your mortgage application as competitive as possible.

Having the least amount of debt possible is a way to increase your borrowing capacity. But when you’re also saving for a deposit at the same time, paying off your debt can be challenging.

You may have left university with a student loan. Perhaps, you have taken out a car loan or incurred credit card debt. Whatever the case, you might find that debt is slowing your progress towards home ownership.

Why paying down your debt is important

The biggest hurdle for many first-time buyers is the deposit required to get in the door. And of course, any money that you divert into a loan reduces the total you can put towards that savings pot.

Plus, one of the big considerations for banks these days is serviceability – whether you have enough free cash each month to pay for everything that needs to be covered. Even a small amount of money committed to another loan can mean a big difference in how big a home loan you can service. For example, 10 per cent of your income going to your student loan could reduce the amount you can borrow by more than $100,000.

Being debt-free shows a bank that you have the commitment required to meet a target and the discipline to make repayments on time.

Lastly, owning a house is often more expensive than people expect. There’s all the stuff you might have planned for: rates, insurance, power, water… but then there are the things you don’t predict such as a hot water cylinder that stops working or your glass sliding door getting smashed by a falling picnic umbrella. If you keep as much of your income as possible free and disposable, you’ll be much more comfortable when unexpected emergencies hit.

Being debt-free: easier said than done?

Does paying off (or down) your debt feel like too high a mountain to climb? The important thing is to have a clear understanding of your financial situation, and identify the steps you need to take.

For example, it may not be feasible to repay all your debt in a short period of time, particularly if you have a big student loan. In this case, it’s a good idea to break down your strategy into manageable steps and make a plan to pay off debt at a pace that suits your budget.

If you’re making all your loan payments, and they’re clearly manageable, a bank may not consider it a huge risk for you to have a small amount of borrowing ticking over alongside your home loan. In any case, if you have debt, it’s always important to declare it. Hiding things from the bank is a big red flag on an application – and could result in you not being approved finance, even if you have affordability.

We can help you put your best foot forward

The property market is cyclical, with periods of booms, slow growth and declines. So keep an eye on where the property cycle is for the area you are choosing to invest in. When price growth is slowing, for example, first-home buyers have a bit of breathing space. But even so, they might pick up again at some point, so it makes sense to get in the door as quickly as possible – otherwise, you might find that your deposit target moves faster than you can keep up.

By paying down as much debt as possible and building a sizeable deposit, you can prepare your finances for this great purchase. And of course, we can help. Debt-free or not, if you’re wondering how to get application-ready, give us a call today. We can show you how to put your best foot forward.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek advice from a financial adviser. 

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