Preparing financially
How existing debt affects your borrowing capacity
Credit cards, personal loans, car finance, BNPL and other debts can reduce what a lender will approve — how much depends on the type of debt and the lender's policy.
- Debt affects an application through three separate channels: monthly serviceability, total debt relative to income, and credit conduct.
- A credit card may be assessed on its approved limit, including unused capacity — not just the current balance — but the exact method varies by lender.
- Paying a balance to $0, reducing a limit and closing an account are three different actions that can have different effects.
- Improving loan approval, cutting interest cost and simplifying the application aren't always the same priority — decide which matters most before acting.
How does existing debt affect a home-loan application?
Debt can affect an application in three separate ways, and it helps to keep them apart. Monthly serviceability — whether your income covers living costs, existing repayments and the proposed mortgage, tested with a buffer of at least 3 percentage points above the loan's actual rate (Australian Prudential Regulation Authority, verified 7 Aug 2026). Total debt relative to income — from February 2026, APRA-regulated lenders may only issue up to 20% of new mortgages at a debt-to-income ratio of 6 or more, assessed separately for owner-occupiers and investors (Australian Prudential Regulation Authority, verified 18 Aug 2026); this is a limit on the lender's overall portfolio, not a rule that automatically approves or declines any one applicant. Credit conduct — your credit report shows accounts, limits, enquiries and repayment history, and missed or late payments can affect an application differently from debt that has always been paid on time.
How do lenders treat different types of debt?
Exact calculations differ between lenders, but the pattern is broadly consistent:
| Debt | What commonly matters | Action that may change the assessment |
|---|---|---|
| Credit card or store card | Approved limit and repayment conduct — often assessed using a notional repayment on the limit, including unused capacity | Pay down the balance, formally reduce the limit, or close the account |
| Personal or car loan | Required repayment, balance and remaining term | Repay it, or obtain evidence of the updated balance |
| Line of credit or overdraft | Approved facility limit, including unused capacity | Reduce or close the facility |
| Buy now, pay later | Current commitments and lender policy — BNPL is a form of credit and using it regularly can be visible to a lender (ASIC (Moneysmart), verified 29 Jul 2026) | Clear amounts owing; ask whether closure is expected |
| Existing mortgage | Repayments, balance and whether the property will be kept or sold | Depends on your plans for that property |
| HELP or HECS debt | Income-linked compulsory repayment — see the dedicated HELP debt guide | See that guide |
Does a zero-balance credit card still count?
It can. A card with no current balance still gives you the ability to borrow up to its approved limit, so a lender may assign a notional monthly repayment to that limit rather than treating the commitment as zero. Paying the balance to $0, reducing the limit and closing the account are three different actions with three different effects — ask the lender you're applying with which one would actually change their assessment before closing a long-standing account you still use.
Which debt should you clear first?
There is no universal order — it depends on your goal, and the goals don't always point the same way:
| Objective | What it usually means |
|---|---|
| Improve lender-assessed capacity | Reduce or close facilities with a high assessed commitment, particularly unused revolving limits |
| Reduce interest cost | Clear the highest-interest debt first |
| Improve monthly cash flow | Target debt with the largest required repayment |
| Simplify the application | Fully close small or unused accounts to reduce the evidence a lender needs to check |
Don't use your deposit savings indiscriminately to clear debt — check what you'd have left for the deposit itself, buying costs and a genuine reserve. See deposit, LVR and LMI and complete buying costs.
Should you consolidate debt before applying?
Consolidating can simplify repayments or reduce the interest rate, but it doesn't make the debt disappear — extending the term can increase the total you pay, and moving unsecured debt into a mortgage secures it against your home for many years. Compare the full cost and term, not just the new monthly repayment, before restructuring debt primarily to qualify for a larger loan.
How long before applying should you act?
There's no universal waiting period, but account changes don't always show up in lender records or credit reports immediately. Ask the provider to confirm a closure or limit reduction in writing, keep the confirmation, and give it to your lender or broker rather than assuming the change will already be visible. Avoid opening replacement credit straight after closing another account, and disclose every liability accurately — undisclosed debts can cause bigger problems than the debt itself.
Practical checklist
Before applying with existing debt
- List every loan, card, overdraft, line of credit and BNPL account, including unused limits
- Get your credit reports and check for forgotten or incorrectly listed accounts
- Ask your lender exactly how they'd treat each liability — balance, limit, or both
- Get written confirmation of any payout, limit reduction or account closure
- Keep enough for the deposit, buying costs and a reserve — don't clear debt at their expense
Questions for a professional
- What monthly commitment will you assign to each of my credit facilities?
- Do you assess the current balance, the approved limit, or both?
- Would reducing the limit be enough, or would you need the account closed?
- Which of my debts is affecting this application the most?
Official resources
- Moneysmart: managing debt
- Moneysmart: debt consolidation and refinancing
- National Debt Helpline: free financial counselling
Sources and methodology
- APRA maintains current macroprudential settings in uncertain environment — Australian Prudential Regulation Authority (retrieved 29 Jul 2026)
- APRA to limit high debt-to-income home loans to constrain riskier lending — Australian Prudential Regulation Authority (retrieved 18 Aug 2026)
- Buy now pay later services — ASIC (Moneysmart) (retrieved 29 Jul 2026)
Figures on this page are drawn from Delora's local knowledge graph, refreshed from these primary sources and checked for changes on a regular schedule. If a figure here looks out of date, the official source above is always the authority — please let us know.