Should you pay off debt or make a bigger down payment before buying a home? Start with the monthly payment each choice changes. Clearing a debt can improve your mortgage qualification even though it leaves you with a larger mortgage. A bigger down payment can be more useful when housing costs are the main constraint.
The practical answer depends on your ratios, your cash reserve and the lender's treatment of that debt. Here is one example that compares the same home and the same savings.
Find the constraint first
Gross debt service (GDS) compares housing costs with gross income. Total debt service (TDS) adds other debt payments. Housing costs generally include mortgage payments, property taxes, heat and half of applicable condo fees. FCAC uses 39% GDS and 44% TDS as guidelines; a lender's criteria and your full application still matter.
Repaying a car loan removes a payment from TDS. It does not directly remove a housing cost from GDS. Putting more cash down reduces the mortgage and can help both. Our TDS guide explains the difference.
Compare one cash pool, two choices
This fictional household earns $120,000 a year before tax, or $10,000 monthly. They want a $600,000 home and have $150,000 available, separate from an emergency fund. They hold $15,000 aside for estimated closing costs in both versions, leaving $135,000 to allocate. The reserve is an assumption, not a quote: FCAC says to budget for closing costs separately, with a general estimate of 1.5% to 4% of the purchase price.
Their only other debt is a car loan with a $15,000 full payout amount and a required $750 monthly payment. Property taxes are $400 monthly, heat is $150, and there are no condo fees. Assume the lender accepts full repayment as removing that obligation.
Both versions use a 25-year amortization and monthly payments. An illustrative 4.50% fixed contract rate gives a 6.50% qualifying rate under the OSFI test for a new uninsured mortgage at a federally regulated lender: the higher of contract rate plus two percentage points or 5.25%. These are example rates, not a current offer.
| Item | Keep car loan | Repay car loan |
|---|---|---|
| Cash used to repay debt | $0 | $15,000 |
| Down payment | $135,000 (22.5%) | $120,000 (20%) |
| Mortgage principal | $465,000 | $480,000 |
| Monthly mortgage payment at qualifying rate | $3,114.68 | $3,215.15 |
| Monthly car payment counted | $750 | $0 |
| GDS | 36.65% | 37.65% |
| TDS | 44.15% | 37.65% |
For this Canadian semiannual-compounding example, the equivalent monthly rate is i = (1 + 0.065/2)^(1/6) - 1. The monthly payment is P × i / [1 - (1 + i)^(-300)], where P is mortgage principal and 300 is 25 years of monthly payments. GDS is (payment + 400 + 150) / 10,000 × 100. TDS adds the car payment to that numerator. Calculations use unrounded payments; displayed amounts are rounded.
Repayment raises the qualifying mortgage payment by $100.47 but removes $750 from other debts. Total qualifying obligations fall by $649.53 monthly. GDS rises because the mortgage is larger, while TDS falls. Against illustrative 39%/44% bands, the first version exceeds TDS and the second is within both. Neither result guarantees approval.
Both down payments remain at least 20%, and this example adds no mortgage default insurance premium. If your choice crosses that boundary, compare again using the applicable down payment and insurance rules.
Confirm which debt payment disappears
Ask your broker or lender which monthly amount they will count and what proof of repayment they need. Paying part of an instalment loan may leave its required payment unchanged.
Credit cards and lines of credit need special care. CMHC's insurance guidance uses at least 3% of the outstanding balance for unsecured cards and lines of credit. That is not a universal rule for every uninsured lender or product. FCAC also notes that institutions may consider revolving credit limits. Confirm the actual policy before moving money.
Test your two versions
Use the MyMortgageMate residential calculator for two independent examples. Save separate copies so each version keeps its own liabilities and down payment. In the repayment copy, subtract the payout from your down payment cash and remove only the debt payment the lender will accept as cleared. Keep income, property costs, rate, amortization and closing reserve the same.
Then check your real budget using the contract payment, insurance, maintenance and everyday expenses. Qualification is only one test. Compare debt interest, payout charges, the loan's remaining term and cash left after closing before choosing. A loan nearly paid off or a tight GDS ratio can change the decision.
Put the figures into a scenario
Use the appropriate assumptions, compare the results and save a summary for your file.
Open the Residential Mortgage Calculator →Sources and review
References checked October 14, 2026. Examples are illustrative; confirm the lender, insurer and program requirements for your situation.