Should you use your home loan to finance your next car purchase?

With interest rates at record lows, financing your next new or used car purchase through your home loan may seem like a very attractive prospect, especially if you have accumulated some decent equity in your home.

There are two ways to finance a new car purchase through your home loan: utilise your existing redraw facility or refinance your home loan.

If you’re not careful though, it can end up costing you far more in the long run. Here are a few simple tips that will ensure you don’t pay over the odds for your new wheels.

Redraw

If you’ve contributed some extra money on top of your minimum repayment on your home loan, then chances are you have a nice little nest egg tucked away inside your mortgage.

Most lenders will allow you to withdraw this extra money which you can use toward the purchase of your next car, but whether this is the best option depends on the terms of your loan.

Some loans will have limits on the amount of money you can withdraw at one time or will charge a fee for using the redraw facility so it’s best to check with your lender first.

If you choose to redraw, it’s also important to keep in mind that you will no longer have the security of the extra money on your home loan and you will be charged slightly more in interest each month which can certainly add up over the life of the loan.

Refinancing

If you haven’t accumulated enough funds in your redraw facility or simply don’t want to chip away at your rainy day fund, then refinancing your current home loan to fund your new car purchase is another option.

This involves either negotiating with your current lender for a better rate, or switching to a new lender to unlock funds for your new car.

While the typical car loan is only three to five years, if you choose to pay for your next car by refinancing your home loan it’s important to remember that you will be paying the car debt over the full term of your home loan – usually 25-30 years.

If you refinance with an additional $25,000 to pay for a new car, at an interest rate of 4.64% you will have paid $21,353.60 in interest over 30 years – far more than what you would have paid with the average car loan.

To really capitalise on the lower interest rates of a mortgage versus other finance, it’s crucial to increase your minimum monthly repayment to an amount equivalent to paying off your car debt in three to five years.

For more financial guidance check out our tips to avoid borrowing beyond your means and what to ask your financial planner before buying a property.