Many home owners use the equity in their property to help them fund the purchase of their next car – but is it the most cost effective way to finance the purchase?
6 June 2016
If you’ve been paying off your home loan for a while, or are ahead on your mortgage repayments, you may have accumulated equity you can redraw. Depending on how much of the property you own, you could potentially use this equity to finance other assets – like a vehicle. However, is this a good idea or should you consider other finance options like a car loan? Read our pros and cons of using the equity in your home to finance your next car.
Convenience – This is the number one reason that borrowers use the equity in their home, via a redraw facility, to purchase a vehicle. Because a buyer doesn’t have to ‘shop around’ for a lender or broker, or undergo any credit checks, this method of obtaining finance can seem like the easiest option. Another advantage is that the purchaser only needs to make one payment per month, to cover both their home and car.
Interest rates – Car loan rates are almost always higher than home loan rates. Due to this, using equity to buy a vehicle can seem more attractive to buyers in the short term. However, purchasers should consider the amount of interest payable over the lifetime of the mortgage, which is a much longer time than a short-term car loan.
Time – Depending on your lender, a redraw can be organised faster. You’ll also avoid having to undergo the same intensive credit checks and income verification steps required for a new loan.
Car loan break costs – If you do sell, it is possible there could be early exit break costs associated with ending the loan early.
Interest accumulated – While redrawing on your mortgage may seem like a fool-proof way to purchase a vehicle, there is a catch. A car loan typically has a five to seven year loan term, whereas a mortgage may have 20 years left to run. This means the longer you owe money on the car, the more it could end up costing you. Redrawing $30,000 from your mortgage, at an interest rate of 4.24 per cent, could end up costing you $44,546 in extra interest over a twenty year period. This means the total cost of your vehicle could work out to be $74,546 if you’re not disciplined to pay it off quickly.
Depreciating value of the asset – The moment you drive a car off the lot, it depreciates by as much as 11 per cent. On a $30,000 car, that’s a loss of $3,300 in value. As a car purchase isn’t considered good debt, you should work out the cheapest borrowing option for the shortest period of time.
Bad habits –The ease of redrawing on your mortgage could encourage further borrowing for other luxury items like a boat, or holiday. This leads to additional debt and the borrower can find themselves with much higher monthly repayments.
No re-draw facility – If there is no redraw facility to easily access available funds, then the borrower may have to apply for a top up on their existing loan, which may require a full application and assessment.
To learn more about Liberty’s range of car loans, click here.