If the time has come to upgrade to a new set of wheels, but your savings won’t quite cover the purchase cost, you might be weighing up your financing options.
What is understandably at the top of the list for most is the loan product’s interest rate, and it makes sense to want to find the lowest rate that’s available to you.
Often, even the most competitive interest rate car loans will still have a higher interest rate than your home loan, and that has a lot to do with the fact that car loan terms are typically around 20 years shorter than home loan terms.
Cars also typically depreciate in value over time, whereas homes are generally more likely to see an increase in value over time. This makes your car loan a bigger risk to the bank than your home loan.
Regardless, this might leave you wondering whether you can add a car loan to your home loan, in order to access a lower interest rate.
There are a couple of potential options you may have if you want to increase your home loan to buy a car:
- Use your redraw facility, or;
- Refinance your home loan to access additional funds.
However, it’s important to understand the potential risks associated before going down that route.
How can I add a car loan to my home loan?
If you’ve been somewhat routinely making extra repayments on your home loan that amount to at least the purchase cost of your desired new vehicle, you could potentially redraw these funds from your home loan account to buy the car.
If your home loan does offer a redraw facility, this could be a reasonably fast and easy process that doesn’t involve reapplying for finance. It would also mean that you’ll avoid having an additional loan repayment to manage.
The biggest sacrifice in taking this option is that you are essentially undoing the hard work you put into making extra repayments on your home loan. Extra repayments can potentially shorten your home loan term by a number of years, reducing your interest charges over the life of the loan. If you redraw, you’ll miss out on these savings which can cost you more money in the long run and prevent you from owning your home sooner.
Also, keep in mind that even if your home loan offers a redraw facility, you may be charged a fee for redrawing funds, plus there could be a limit to how much you can redraw.
Your second option is to refinance your home loan in order to access additional funds to buy a car. You could do this with your current lender, or switch to a new lender if that means potentially accessing a more competitive rate.
While refinancing for this purpose will give you access to your home loan’s interest rate instead of a likely higher car loan rate, keep in mind that it also means you will be paying off your car over a much longer period of time. In fact, there’s a good chance you’ll still be paying off your car when the time comes to upgrade it again.
Despite the potential to access a lower interest rate, the considerably longer loan term will likely mean paying thousands of dollars more in interest charges over the life of the loan.
Other perceived advantages and potential long-term consequences
Often the decision to upgrade your car comes out of necessity over want. The family car may have done its dash and maintenance costs might be steadily rising at every regular service.
If this is the case, you may not have been prepared for any extra repayments additional to your current home loan repayments. Accessing your redraw or refinancing your mortgage is one way to get around adding to your regular monthly liabilities, but it will likely come at a substantial cost.
Again, depending how long is left on your mortgage term, using your home loan to buy a car without increasing your current home loan repayments will generally mean paying much more in interest charges than if you take out a separate car loan.
What are some alternative options?
Even though you can increase your home loan to buy a car, it doesn’t mean it’s the best option.
If you’re interested in keeping your overall repayment costs down without potentially adding a substantial amount to your long-term interest charges, consider these alternatives:
- Buy used: Brand new cars depreciate in value at a steady rate, meaning buying second-hand could save you thousands and allow you to take out a smaller loan.
- Choose a car loan on a longer term: If the cost of your immediate repayments is your biggest worry, you could reduce them by opting for a car loan with a longer loan term, such as seven years instead of five. Even though this typically means paying more interest over the life of the loan, it is still much shorter than an average 25-year mortgage.
- Use your mortgage, but increase your repayments: If you are still interested in consolidating your mortgage and car loan, do your calculations and make extra repayments that will pay your car off over an average car loan term. Some home loan lenders will even allow you to put the amount you borrow for your car into a sub-account, potentially making it easier for you to ensure you pay it off within around five years.
For advice specific to your unique financial circumstances, consider reaching out to a financial advisor.