Buying a car is a significant investment, but according to industry experts, more and more Australians are making the commitment and relying on car finance to do so. Some are using their home loan for the finance but is that really a good idea?
Pros of Using Home Equity
Car loans usually have a higher interest rate compared to home loans, so it is worth looking into using your home loan to fund your purchase. With rising house prices and record low-interest rates, some homeowners have refinanced their mortgage and released equity saved in their home in order to fund big purchases such as a new car (IBISWorld).
By doing this, not only will you save on interest, but you will also have the convenience of only having one repayment each month and being able to track your expenses more easily.
Pay off your loan over a set term
If you decide to use your home loan to fund the purchase of your next car, do not set and forget. While you will be saving money on interest by using your home loan, if you spread out the repayments over the years remaining on your home loan, you will end up paying more interest than you need to, which defeats the purpose of using your mortgage in the first place. To fully reap the rewards, create a set term to repay the car loan by. Aim for less than five years so that you are not paying any extra interest unnecessarily.
Cons of Using a Home Equity Loan for a Car Purchase
Higher interest rates with a home equity loan
The interest rate with a home equity loan is typically lower than the interest rate on a personal loan, consumer car loan or novated lease ( Salary Packaging). But when you compare home equity loan rates with auto loan rates, you’ll find that auto loan rates are usually cheaper—especially if you have good credit.
When you apply for a home equity loan with good credit, the lender might charge a competitive interest rate as low as 4% p.a or 5%p.a. This is impressive, but the rate doesn’t compare with low rates offered by auto lenders. Well-qualified buyers can get an auto loan with rates as low as 6.5% to 7.5%. When you apply for an auto loan through a bank, most lenders allow terms between 36 months and 60 months. Depending on the bank, you can stretch the auto loan as far out as 72 months or 84 months. A five-year term is doable for most people.
On the other hand, typically has a repayment term up to 10 to 20 years. Although you wouldn’t finance a car for 10 years (or at least you shouldn’t), a home equity loan gives you the option of paying off the car over an extended period if you can’t find an auto lender to stretch your term beyond five years. Be aware that the longer it takes to pay off a car, the more interest you’ll pay.
You can get a car with no down payment
Nowadays, it’s practically the norm to purchase a car with no down payment—even with less-than-perfect credit. This means you can buy a car and pay absolutely nothing out-of-pocket. There are other auto finance products that allow you to purchase a car without any deposit or down payment such as Salary Packaging with Novated Lease. There are more than one benefit if you purchase a car through salary packaging (that can be researched on our website).
A home equity loan, on the other hand, is a type of mortgage. And just about every mortgage has set up or transaction costs. Granted, the closing costs will be cheaper than the costs of getting a first mortgage, but you’ll still need cash on hand to complete the transaction. Unless you have a redraw facility ready to draw down funds from your home equity or refinance the current mortgage with a cash-out purpose to purchase your car.
