Buying a home is one of the most significant financial decisions you’ll make in your lifetime. For many South Australians, the dream of homeownership can feel out of reach when burdened with personal debt. Reducing this debt not only makes it easier to save for a home deposit but also improves your chances of securing a favourable mortgage. Here are smart and practical strategies to reduce personal debt before you buy a home.

Why Reducing Debt is Important Before Buying a Home

Carrying high levels of debt impacts your borrowing capacity, credit score, and ability to secure a loan with competitive terms. Lenders look at your debt-to-income ratio (DTI)—the percentage of your income that goes toward debt repayments—to determine your eligibility for a mortgage. Lowering your debt can improve your financial health and give you more options when it comes to choosing a home loan.

1. Assess Your Financial Situation

The first step in reducing debt is understanding where you stand financially.

• List All Your Debts: Write down every outstanding debt, including credit cards, personal loans, car loans, and any other obligations. Include the total amount owed, monthly repayments, and interest rates.
• Calculate Your Debt-to-Income Ratio: This key metric shows how much of your income is being used to pay off debt. To calculate it, divide your total monthly debt payments by your gross monthly income and multiply by 100. A lower DTI indicates healthier finances and improves your appeal to lenders.

Taking stock of your debts provides a clear picture of what needs to be tackled first.

2. Prioritise High-Interest Debts

High-interest debts, such as credit card balances, can quickly spiral out of control if not managed effectively.

• Pay Off Credit Card Debt First: Focus on clearing debts with the highest interest rates first, as they cost you the most over time.
• Use the Avalanche or Snowball Method:
  • The Avalanche Method prioritises paying off high-interest debts first while making minimum payments on others.
  • The Snowball Method focuses on paying off smaller debts first to build momentum.

Reducing high-interest debts can free up more money to put toward savings or other debts.

3. Avoid Accumulating New Debt

While reducing existing debt, it’s equally important to avoid taking on new debt.

• Refrain from Using Credit Cards: Switch to using cash or debit cards for daily expenses to avoid adding to your balance.
• Avoid Financing Large Purchases: Delay any big-ticket purchases, such as cars or appliances, until after you’ve bought your home.
• Be Wary of Buy-Now-Pay-Later Services: While convenient, these services can lead to overspending and missed payments, which harm your credit score.

Maintaining your current debt levels—or better yet, reducing them—is crucial as you prepare for homeownership.

4. Create and Stick to a Budget

A well-planned budget is your best tool for managing debt and saving for a home deposit.

• Track Your Income and Expenses: Use apps or spreadsheets to monitor your cash flow. Identify areas where you can cut back, such as dining out or subscriptions.
• Set Savings Goals: Calculate how much you need for a deposit and closing costs. Aim to save at least 20% of the home price to avoid additional costs like Lender’s Mortgage Insurance (LMI).

Sticking to a budget ensures that every dollar works toward reducing debt or building your savings.

5. Consider Debt Consolidation

Debt consolidation combines multiple debts into one loan with a lower interest rate, simplifying repayments.

• Personal Loans or Balance Transfers: A personal loan with a lower interest rate can help pay off high-interest credit card debt. Similarly, transferring credit card balances to a card with an introductory 0% interest period can save money.
• Be Cautious: Ensure the new loan doesn’t have hidden fees or a longer repayment term that negates the savings.

Debt consolidation can be a game-changer, but it’s important to do your research to find the best options.

6. Improve Your Credit Score

A good credit score increases your chances of being approved for a loan with better terms.

• Make Payments On Time: Timely payments are one of the biggest factors in maintaining a good credit score.
• Check Your Credit Report: Obtain a free copy of your credit report and look for errors or inaccuracies that could hurt your score.

Improving your credit score can also lower your interest rates on loans, saving you thousands over time.

7. Increase Your Income

Boosting your income can accelerate debt repayment and improve your savings.

• Take on a Side Job: Whether it’s freelancing, tutoring, or weekend shifts, additional income can go straight toward debt repayment.
• Sell Unnecessary Items: Decluttering your home and selling unused items can provide a quick cash injection.

Even small income boosts can make a significant difference when applied consistently.

8. Seek Professional Financial Advice

If managing debt feels overwhelming, consider seeking professional help.

• Financial Planners: They can provide tailored advice to help you reduce debt and prepare for homeownership.
• Free Resources: Organisations like the National Debt Helpline offer free tools and guidance to help you get back on track.

Professional advice ensures you’re making informed decisions to achieve your financial goals.

Final Thoughts

Reducing personal debt is a critical step toward buying a home in South Australia. By following these strategies, you’ll not only improve your financial stability but also enhance your ability to secure a competitive mortgage. Remember, the journey to homeownership is a marathon, not a sprint. Stay disciplined, stick to your plan, and you’ll be one step closer to turning your dream home into a reality.