Should I Pay Off Debt or Save for a House Deposit in NZ? A Mortgage Adviser's View
Here's what I believe: People who are determined to build a better life—and willing to take small, consistent steps—are the ones who actually become homeowners.
But here's the trap: if you're working towards the wrong target, those consistent steps won't get you where you want to go.
Right now, you might be facing a question that's surprisingly difficult to answer:
Should I keep building my deposit, or use some of my savings to pay off my debt?
I get it. You've been working hard. Saving consistently. Sacrificing. And now you're stuck wondering if you're even focusing on the right thing.
That uncertainty is exhausting.
The good news? This question has an answer. But the answer isn't the same for everyone—and that's exactly what I want to help you figure out.
I've been doing this for 20 years. I've helped over 100 families get into their first home. And one of the most common mistakes I see is people working hard—but towards the wrong target.
So let me show you how to figure out the right target for your situation.
This Article Is For You If:
You're a first-home buyer in NZ
You have some savings AND some debt
You're not sure what to focus on first
You want to know what will actually get you into a home faster—not just generic advice
The Big Picture: It's Not Just About Your Deposit
At first glance, saving the biggest deposit possible seems like the obvious answer. A larger deposit means a smaller mortgage and more equity in your home.
But that's only part of the picture.
When a bank assesses a home-loan application, it isn't looking only at your deposit. It's also looking at your income, existing debts, monthly commitments, account conduct and whether you have enough surplus income to comfortably service the proposed mortgage.
That means there are situations where using some of your savings to repay debt could put you in a stronger borrowing position than simply adding the same amount to your deposit.
The key is knowing which strategy makes sense for your particular situation.
Why One Client's $15,000 Decision Changed Everything
Last year, I worked with a couple who had $60,000 saved and a $15,000 car loan.
They were convinced they needed to keep saving until they hit a 20% deposit—which meant another 18 months of renting.
But when we ran the numbers, we discovered something:
They already had enough deposit for the property they wanted. The car loan wasn't blocking them from buying—it was just reducing their borrowing capacity slightly.
We had two options:
Option 1: Use $15,000 to pay off the car (stronger servicing, but smaller deposit)
Option 2: Keep the $15,000 as deposit (slightly weaker servicing, but more equity)
We ran both scenarios. Option 1 gave them stronger borrowing capacity and left them with an emergency buffer. Option 2 didn't meaningfully improve their position.
They repaid the car. Got approved. And moved into their home 18 months earlier than they thought possible.
They didn't need perfect. They needed clarity.
That's what changed everything.
Start With the Deposit You Actually Need
Before deciding what debt to repay, the first step is to establish the deposit required for the type of purchase you're considering.
A 20% deposit is still an important benchmark, but it isn't necessarily the minimum required to buy a home in New Zealand.
For example, eligible buyers using the Kāinga Ora First Home Loan can currently purchase with a 5% deposit, subject to meeting the scheme's eligibility requirements and the participating lender's lending criteria.
Banks can also make some conventional owner-occupier lending above 80% LVR. Under the Reserve Bank's current settings, up to 25% of a bank's new owner-occupier lending can have an LVR above 80%. That doesn't mean everyone with less than 20% will be approved—each bank still has its own lending criteria—but it does mean you might have more options than you think.
So rather than automatically saying:
"Use all your savings to repay your debt."
The first question is:
How much deposit do we need to preserve?
Once we've established that, we can look at whether any money above that amount could be put to better use reducing debt.
Once You Have Enough Deposit, Debt Can Become the Bigger Problem
Here's where things get interesting.
Let's say you've accumulated enough money for the deposit required for the property you want to buy.
You also have $15,000 of consumer debt and another $15,000 available.
You could put that extra $15,000 into the property and have a larger deposit.
Or you could use it to repay the debt.
Which is better?
There isn't a universal answer because we need to run the servicing calculations.
But, all other things being equal, once the required deposit has been achieved, repaying consumer debt can increase the potential home-loan amount the bank is prepared to approve.
Why?
Because the bank isn't simply interested in how much you owe.
It's interested in the financial commitments associated with that debt and how much money you'll have available each month to service your new mortgage.
That's why someone can sometimes improve their home-buying position more by eliminating debt than by simply continuing to accumulate a larger deposit.
Not All Debt Is Equal When You're Applying for a Mortgage
If you don't have enough surplus cash to repay everything, here's generally how I'd look at debt priority:
Buy Now Pay Later
Credit cards
Car loans
But that's a starting point—not a rule I blindly apply to every application.
I'd still run a servicing calculation to determine which repayment strategy produces the strongest monthly surplus and borrowing position.
There is also a qualitative difference between the debts.
BNPL and credit-card debt are more likely to be associated with discretionary consumer spending.
A car loan can be different. Banks understand that a vehicle may be necessary to get to work and earn an income.
That doesn't mean a car loan doesn't matter. Its repayments still affect servicing.
But when preparing a mortgage application, I look at both the numbers and the story your finances tell.
Why I Would Usually Deal With BNPL First
A first-home buyer might say:
"I've only got $800 owing on Afterpay. Surely that's irrelevant when I'm trying to borrow hundreds of thousands of dollars?"
Not necessarily.
From a mortgage-application perspective, there are two potential issues.
First, the BNPL commitment needs to be taken into account when assessing your expenses and servicing position.
On a very strong application, that might make little practical difference.
On a marginal application, small commitments can matter.
Second, in my experience, banks generally don't like seeing applicants relying heavily on BNPL facilities.
When you're asking a bank to lend you a substantial amount of money over potentially decades, it wants confidence that you can manage your cash flow and have sufficient money available to meet your commitments.
Regular reliance on short-term consumer credit doesn't necessarily help that picture.
Here's the truth:
If a BNPL facility could jeopardise your mortgage application and you don't need it, why keep it?
Depending on the application, I'd generally prefer to see unnecessary BNPL facilities repaid and closed.
A $10,000 Credit Card Can Matter Even If You Only Owe $500
Credit cards are another area first-home buyers frequently misunderstand.
Suppose you have a credit card with a $10,000 limit but only $500 outstanding.
You might reasonably think the bank will look at the $500.
That's not necessarily how mortgage servicing works.
Banks can assess the potential commitment based on the credit limit, because you have the ability to draw the available credit after the mortgage is approved.
In my experience, a common servicing treatment has been to allow approximately 3% of the credit-card limit as a monthly commitment, although the exact treatment varies between lenders and can change.
On a $10,000 limit, 3% would represent $300 per month.
That's quite different from simply looking at the $500 you currently owe.
This is why reducing or closing an unused credit-card facility can sometimes increase potential borrowing capacity.
But I don't automatically tell every first-home buyer to close every credit card.
If the bank is already prepared to lend you the amount you need, keeping a sensible credit-card facility may make no difference to the outcome.
If you need to maximise your borrowing capacity, that's when we'd look carefully at whether the facility should be reduced or closed as part of the application.
What About a Car Loan?
Let's say you have $20,000 remaining on a car loan and $20,000 in additional cash.
Should you put the $20,000 into your house deposit or repay the car?
The answer starts with another question:
How much do you need the bank to lend you?
If you've already achieved the deposit required and you need to maximise the amount the bank will approve, we'd generally look at having the car loan repaid as part of the mortgage application.
Removing the car-loan repayment can improve the monthly servicing position.
But if you can already comfortably obtain the home loan you need, we may reach a different conclusion.
This is why I don't like generic advice such as:
"Always pay off all your debt before buying a house."
The objective isn't necessarily to become completely debt-free before you buy.
The objective is to put yourself in the strongest position to buy the home you want without unnecessarily weakening another part of your financial position.
Don't Use Every Dollar Just to Get Into the House
There's another side to this discussion that I think is extremely important.
I would not be comfortable recommending that a first-home buyer put every available dollar into their deposit and debt repayment and then arrive at settlement with virtually nothing left.
Here's why:
Buying the house isn't the end of the financial journey. It's the beginning of home ownership.
Things happen.
The hot-water cylinder fails.
The car needs repairing.
There's an unexpected medical or dental expense.
You discover something in the house that needs fixing.
Your income temporarily drops.
That's why I believe it's prudent, where possible, to retain some accessible cash after settlement for emergencies.
A Slightly Bigger Mortgage Can Sometimes Be Worth the Flexibility
Suppose putting another $10,000 into your deposit would reduce your mortgage slightly but leave you with no emergency savings.
I wouldn't automatically assume that's the best decision.
Depending on the circumstances and the loan structure, retaining some funds in an offset account or revolving-credit facility could allow those funds to reduce the effective interest cost while still keeping the money accessible if it's needed.
There are risks with revolving credit, particularly if the facility encourages you to spend money that should remain as your emergency reserve, so the structure needs to suit the borrower.
But the broader principle is important:
Don't structure your finances just to survive settlement day. Structure them so you can cope with what happens after settlement too.
If you put every dollar into the house and then need $10,000 three months later, you can't assume the bank will simply increase your mortgage.
This can be particularly problematic for borrowers with limited equity. The Reserve Bank's LVR rules can apply to top-up lending where the combined debt moves above the high-LVR threshold, and the bank will still apply its own lending criteria.
If additional mortgage lending isn't available, you could find yourself having to use other forms of credit at substantially higher interest rates than a home loan.
That's not where I want you to end up.
Should You Just Wait Until You Have a 20% Deposit and No Debt?
This sounds like the safest strategy:
"I'll repay all my debt, save a 20% deposit and then buy."
And sometimes that will absolutely be the right decision.
But you need to calculate the cost of waiting.
Suppose it will take you another two years to repay your debt and build your deposit from 10% to 20%.
Here's what I'd want to know:
How much rent will you pay during those two years?
Then:
What might happen to the price of the type of property you want to buy during that period?
If the price increases, your 20% deposit target increases with it.
And then there's another question:
What could happen to your borrowing capacity during those two years?
Interest rates and bank assessment criteria can change. Your income or expenses can change. Lending policies can change.
For older first-home buyers, there's another consideration.
Waiting several more years can potentially affect the loan term a lender is comfortable assessing in the circumstances. A shorter loan term means higher required repayments for the same loan amount, which can affect borrowing capacity.
You could therefore reach your target of 20% deposit + no consumer debt and still discover that the property you could have purchased earlier is no longer within your reach.
I'm not suggesting you should rush into buying because property prices might rise.
I'm saying you should understand the trade-off before automatically deciding that waiting for 20% is the safest strategy.
Here's the truth: Don't measure your progress towards your first home by your deposit percentage alone. What matters is whether your overall ability to buy is improving.
So, Should You Pay Off Debt or Save More Deposit?
For most people, the answer can't be determined by looking at one number.
This is exactly the kind of question The Home Ready Method helps you answer. Not with generic advice—but by looking at your specific numbers, your actual borrowing capacity, and creating a clear plan based on what will work for you.
Here's how we'd work through it:
First, establish the deposit required for the type of purchase you're considering.
Then protect that amount.
Second, calculate how much you realistically need to borrow.
If you're already comfortably within the bank's servicing position, you may not need to eliminate every debt.
Third, look at which debts are restricting borrowing capacity.
BNPL, credit-card facilities and car loans can all affect the application differently.
Fourth, calculate what happens if we repay each debt.
Which option produces the strongest servicing result?
Finally, don't forget the day after settlement.
I'd rather see you buy a home with a sensible financial buffer than use every available dollar just to maximise your deposit.
This isn't about producing the biggest possible deposit.
It's about producing the strongest overall home-loan application while leaving you in a sustainable financial position after you buy.
Because clarity beats guessing every time.
Don't Spend the Next Six Months Guessing
If you're sitting there with a deposit that's growing, a car loan, a credit card, perhaps a BNPL facility, and money left over each month—you might be wondering what you should focus on first.
Should you save another $10,000?
Close the credit card?
Repay the car?
Get rid of BNPL?
Or could you actually be in a position to buy now?
Here's what I believe: You shouldn't have to figure this out alone. That's what I'm here for.
Take my free 3-minute Mortgage Quiz and tell me about your deposit, income, debts and plans. I'll review your answers before we meet, so we can spend your consultation discussing what's actually possible—and what you should do next.
It's free. Private. No pressure. Just clarity.
Because you deserve to know if you're on the right track—not spend another six months guessing.
Don't work on everything. Find out what you actually need to work on.