Low interest rates on home loans make it appealing to roll a car loan into your mortgage. At face value this makes sense, but there are significant risks!
If you’re not careful, your new car could cost you a lot more than if you took out a separate car loan!
In fact, in a worse-case scenario, you could end up paying more than double the original cost of your vehicle
The upside of using you
Given car loans will cost more (on average between 4% and 5%) it is certainly worth considering the benefits of using equity in your home.
These can include:
You may be able to redraw your home loan and not need to submit a new loan application – saving both time and hassle!
- No credit check required
- At face value you will save money
- It is convenient
- You can maintain your current home loan repayments
So, given this is the case, what is the downside?
Good intentions vs. Reality – Downside Number 1!
When we redraw from our home loan, we start out with the intention of repaying the “car loan” portion of our home loan off over say three or four years.
However, who is going to ensure we actually do it?
Over a period of three or four years, many things can occur (a new family member, unexpected house repairs or renovations, change of employment etc.).
Life has a habit of throwing us curved balls – which even the best planning can’t anticipate.
When this occurs, it is easy to say to forego the additional loan repayments we started making with the intention of “catching up later”. However, the risk is that life takes precedence over good intentions – and we end up paying a lot more!!!
Compounding Interest – Downside Number 2
Any portion of the “car loan” we don’t repay will incur compounding interest over the term of the home loan. The $’s involved can be significant.
Even with low interest rates, compounding interest can mean the real cost of your new car is significantly more than if you had taken out a car loan at a higher rate!
Worse, if you didn’t increase your home loan repayments to cover the cost of the new car, on a $40,000 car at 4.50%, you’d pay close to a whopping $33,000 in interest by the time you paid off your home loan!
This means your average-priced car ends up costing you over $70,000!!!!
Time to upgrade – Downside Number 3
At some point you will need to upgrade your car – however if you haven’t fully cleared the original amount you have redrawn against your home loan, will this be possible?
You simply may not be able to afford to purchase that new vehicle that you really need.
Either that, or you do another redraw (if available), or take out a new loan, and the original amount you haven’t cleared, continues to compound interest. Each month it builds and builds!!!
Increasing Your Home Loan – Downside 4
If you are unable to redraw on your home loan and need to apply for an increase to your existing loan – be aware that even though you already have a loan, you will need to provide a considerable amount of information and supporting material.
In the current climate Banks now assess all new home loan applications in granular detail!
We recently did a blog post that outlines what is now involved that is worth reading so that you are fully prepared.
Don’t make a mistake which you will regret!
Using the redraw you have in your home loan instead of taking out a car loan, seems to make sense from a cost perspective.
However, it is not without pitfalls. As outlined, you may end up paying significantly more!
To make it work you will need to be exceptionally disciplined – and trust that unexpected events do not arise!
Before considering this option, always do your homework as the downside can be significant!
If you decide it is more prudent to take out a separate car loan, don’t hesitate to give me a call, I will be happy to outline the options available!
