Does Paying Off Debt Improve Your Mortgage Chances? Here’s the Truth
If you’re thinking about applying for a mortgage, you’ve probably wondered whether it’s best to pay off existing debt first. It’s a common question — and the answer isn’t as simple as “yes” or “no.”
In many cases, paying off debt can improve your mortgage chances, but there are times when it might actually limit your options or delay your application unnecessarily.
At Mortgage Bridge, we help people every day who want to understand the smartest way to prepare for a mortgage — whether they have loans, car finance, or several credit cards. Here’s the full picture.
What Do Lenders Really Look At?
When applying for a mortgage, lenders assess two main things:
- Affordability – Can you comfortably afford the repayments?
- Credit history – Have you shown consistent, responsible money management?
Debt itself isn’t automatically a red flag. Most people have some level of borrowing — it’s how it fits into your overall financial profile that matters.
If you’re making all your payments on time and keeping credit usage reasonable, lenders often see that as a positive sign of stability. But if your debts are high relative to your income, it could limit how much you can borrow.
So… Does Paying Off Debt Improve Mortgage Chances?
In short — yes, but not always in the way you might think.
Paying off debt can improve your affordability score (how much lenders think you can safely borrow), because you’ll have fewer monthly commitments. However, paying off debt doesn’t automatically raise your credit score overnight — especially if you close the account right after.
Let’s break it down.
1. Paying Off Debt Can Improve Affordability
Lenders include all your regular debt payments — such as credit cards, loans, and car finance — when calculating affordability.
For example:
If you earn £3,000 per month and spend £300 on debt repayments, that reduces the amount available for your mortgage payment. Clearing some or all of that debt can increase your available income and improve your affordability ratio.
In this case, paying off debt does make a clear difference to your borrowing potential.
2. But Paying Off Debt Doesn’t Automatically Boost Credit Score
Here’s a common misconception: people often assume clearing debts will instantly increase their credit score. That’s not always true.
Credit scoring models look for:
- A history of regular, on-time payments
- A low credit utilisation ratio (how much of your available credit you’re using)
- A mix of credit types, not just zero balances
If you pay off a credit card and then close it, your utilisation ratio and credit history length may shrink — which can temporarily reduce your score.
So while paying off debt is good financially, you don’t always need to rush to close accounts right before applying for a mortgage.
3. Reducing Credit Card Balances Helps the Most
Of all types of debt, credit card balances tend to have the biggest influence on mortgage approval.
Lenders look closely at your credit utilisation, ideally wanting to see it below 30% of your total limit.
For example:
If your total card limit is £5,000 and you owe £4,000, that’s 80% utilisation — which can make lenders nervous. Reducing that to £1,000 brings it to 20%, which looks much healthier.
You don’t need to clear every balance to zero — just getting utilisation down can significantly improve how your profile appears.
4. Personal Loans Can Be Seen Positively
Surprisingly, having a small loan that you’re repaying reliably can actually strengthen your mortgage application. It shows that you can manage credit over time without issues.
However, large or multiple loans — especially those with short remaining terms — can reduce affordability. In these cases, paying them off (or down) before applying can make sense.
If you’ve recently taken out a loan, lenders will want to see at least a few months of on-time payments before considering you.
5. Car Finance Has a Bigger Impact Than Most People Expect
Car finance payments are often higher than credit cards or personal loans, and lenders treat them as a fixed long-term commitment.
If your car payment is £400–£500 per month, that directly reduces your disposable income for mortgage affordability calculations.
If your agreement is nearly finished, waiting until it ends — or paying it off early — could noticeably improve your borrowing potential.
6. Don’t Pay Off Everything and Drain Your Savings
Here’s where many applicants go wrong: they clear every debt they can and use up savings that could have gone toward a deposit or fees.
Lenders prefer a balanced approach — moderate, well-managed debt alongside healthy savings.
If paying off debt means reducing your deposit below 10% (or losing your emergency buffer), it might hurt more than it helps.
It’s usually better to:
- Clear only high-interest or maxed-out debts.
- Keep at least 3–6 months of expenses saved.
- Maintain a decent deposit to access better rates.
7. Timing Matters: Pay Off Debt Early, Not Right Before Applying
If you plan to apply for a mortgage soon, don’t make large one-off debt repayments just weeks before — lenders may not see those updates immediately on your credit file.
It’s best to start reducing debts 3–6 months before applying. This gives your credit report time to update and reflect your improved situation.
If you’re unsure when to start, a mortgage adviser can help create a timeline that works for your specific circumstances.
Example: How Paying Off Debt Changed Borrowing Power
Let’s look at two hypothetical applicants:
Applicant A
- Income: £45,000
- Monthly debts: £500 (car finance + credit cards)
- Deposit: £20,000
Applicant B
- Income: £45,000
- Monthly debts: £100 (after paying off credit cards)
- Deposit: £20,000
Applicant B could borrow roughly £20,000–£30,000 more, simply because their ongoing debts were lower — even though their income and deposit were the same.
That’s the power of balancing debt reduction and affordability planning effectively.
When Paying Off Debt Might Not Help
It might surprise you, but there are a few times when paying off debt won’t significantly improve your chances — or could even backfire slightly.
- If your credit score is already excellent. Clearing small, manageable debts won’t make a big difference.
- If your debt is nearly paid off. A few remaining payments may not affect affordability enough to justify losing cash flow.
- If you close long-standing accounts. This can shorten your credit history and temporarily reduce your score.
In these cases, keeping accounts open with zero or small balances is usually smarter.
What’s Better: Paying Off Debt or Saving for a Deposit?
It depends on your goals and timeline.
- If your debts are large and high-interest, paying them down can boost both affordability and long-term savings.
- If your debts are small and manageable, focusing on building your deposit can often have a bigger impact — particularly if you’re near key thresholds like 10% or 15%.
At Mortgage Bridge, we often help clients run both scenarios side-by-side. In some cases, paying off £2,000 of debt can raise your borrowing potential more than increasing your deposit by the same amount. It’s all about finding the right balance.
How Mortgage Bridge Can Help
At Mortgage Bridge, we specialise in helping clients make smart financial decisions before applying.
We’ll:
- Review your full credit profile.
- Analyse how your debts affect affordability.
- Recommend whether to pay off, reduce, or maintain balances.
- Match you with lenders that best fit your current circumstances.
You don’t need to navigate this alone — we’ll help you understand exactly how your debts, income, and savings interact in the eyes of lenders.
If you’d like to talk through your situation, we’re here to help you take the next step confidently.