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How to Minimise Monthly Debt in Preparation for a Mortgage

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For many would-be homeowners, the biggest obstacle to buying a house is saving for a down payment. However, there is another major factor that can impact your ability to get a mortgage: monthly debt. 

Lenders will often follow the ’28/36 rule’, a common-sense rule used to determine the amount of debt an individual or household should take on. According to the rule, you should spend a maximum of 28% of your gross monthly income on total housing expenses – and no more than 36% on total debt, including housing and other debt such as credit cards and auto loans. So, it’s important to take steps to minimize your debt before you start house hunting.

Here are a few strategies for reducing your debt-to-income (DTI) ratio as you prepare to apply for a mortgage:

Refinance your student loans

One way to reduce the amount of debt you owe is to refinance your student loans. Generally, a viable option for borrowers with high-interest rate private student loans, refinancing involves taking out a new loan with a lower interest rate and using the money to pay off your existing loans. As a result, you may be able to save money on interest and have a lower monthly payment. Note that by refinancing, you’ll likely need a good credit score and you may no longer qualify for existing or future benefits offered by the federal government to federal loan holders, such as income-driven repayment, federal forbearance, and any other benefits offered to federal borrowers, learn more at studentaid.gov.

Consolidate your student loans

If you have student loans through multiple loan servicers, then consolidation could be a good option. Through consolidation, you may be able to lower your monthly payment, change any variable-rate loans you have to a fixed interest rate, and simplify your repayment schedule into one monthly payment. You can also apply for an income-driven repayment plan for federal loans. If you’re pursuing federal loan forgiveness through Public Service Loan Forgiveness (PSLF) and have other types of federal loans (such as Federal Perkins or FFEL loans), you will need to consolidate them into a Direct Loan. Make sure you check if your employer qualifies under the PSLF programme before consolidating.

Regardless of which route you choose, finding a way to reduce your monthly student loan payments is a good way to free up extra cash to put towards paying down other debts.

Pay off your credit cards

Another way you can get your debt under control is to focus on paying off high-interest-rate credit cards first. The reason for this is that the higher the interest rate, the more money you’ll end up paying in interest charges over time. By targeting your highest interest rate cards first, you’ll be able to save money in the long run and get your debt under control more quickly. 

Another benefit of focusing on high-interest rate cards is that they can help to improve your credit score. By paying off these cards, you’ll be reducing your overall credit utilization ratio, which is one of the key factors that lenders look at when determining your creditworthiness. 

Make a budget and stick to it

A great way to reduce debt is to create a budget you can follow. A budget lets you see exactly where your money is going and where you can cut back to free up some extra cash. 

When creating a budget, including all of your regular expenses, such as rent, utilities, groceries, and transportation costs. Then, track your spending for a month or so to get a better idea of where your money is going. Finally, adjust your budget as needed to reduce your overall spending.

Get help from a professional 

If you’re struggling to get your debt under control, consider talking to a financial advisor or credit counsellor. They can help you create a plan to pay off your debts and improve your financial situation.

By following these tips, you can make a dent in your debt and improve your chances of getting approved for a mortgage. Just remember to be patient and stay disciplined with your payments. The sooner you can get your debt under control, the better off you’ll be.


Zuella Montemayor did her degree in psychology at the University of Toronto. She is interested in mental health, wellness, and lifestyle.

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