Home owners often look to top up their home loan to buy a car. To achieve this they borrow against their existing equity.
This is not always the best idea. Many believe it will save them money in interest. In the long run it could cost them far more.
Home loans generally last for 30 years. This long loan term helps keeps the repayments low. This makes sense also as you would still expect the house to be around after the loan is paid.
While it may not be in quite as good a condition it should still be standing. A car is unlikely to still be running in 30 years time. For this reason you wouldn’t want to be paying it off over 30 years.
Most car loans are for a shorter term. generally around 5 years. Whilst a car should last longer than 5 years you wouldn’t want to be paying it off for longer than this.
Past results show that houses will tend to increase in value over the long term. A car is far more likely to decrease in value.
The main reason borrowers look to top up their home loan is to have lower repayments. Home loans generally have a lower rate of interest than a car loan. The main reason repayments are lower is due to the shortened loan term rather than the interest rate.
Take the example of a $30,000 car loan.
Repayments on a home loan at a rate of 4% over 30 years would be approximately $143 per month. Total interest payable assuming no change in rates would be $21,560 over the term of the loan.
Now consider instead that a car loan was taken out at a rate of 6%. Monthly repayments would be $579 per month. But the total interest payable assuming no change in rates would be $4,799.
This reduces the total interest paid by $16,761 between the two loans.
Borrowing against the home uses equity that could be better utilised for future investments. This could include an investment property or a business loan.
Ttopping up your home loan for car could use up all your borrowable equity. This may result in decreasing your future borrowing ability.
It is easier to borrow for a car loan at the start than to use the car as security for future loans.
It is possible to borrow against your home for terms shorter than 30 years. For borrowers who qualify, and are not concerned about using equity we recommend considering a shorter loan term.
We also strongly encourage the loan be done as a separate split to the main home loan. This can allow borrowers to target this loan paying it off faster than their main home loan.
If you’re interested in buying a car we can help. We can discuss whether it is worthwhile using your equity or if you would be better taking a separate car loan.
If you need quotes for a car loan we can help. Click the ask a question button and we will be in touch.