Should I use my home loan re-draw to finance a new car?
You have been making regular extra repayments on your home loan and you have built up a significant “in advance” position. First of all – well done. You are also thinking that that the kids are getting bigger, and you are starting to feel like the local taxi service for the Under 12’s. Time for a bigger car.
The easiest thing is to find the new car and re-draw on your home loan to pay the car outright. Or at least it feels like you have just bought it outright because your home loan balance has just increased and you will need to pay it back over time
By using your own re-draw position there’s no need for an application, additional credit checks and you’ll still make only one repayment each month or fortnight.
The key benefit of using home equity is that home loan interest rates are typically far lower than those you can expect to pay on a car loan. So what is the down side?
Home loans are a very long term debt. So you’ll be paying interest on the car for a far longer period than you would with a car loan, and that can really ramp up the cost of the vehicle.
As a guide, adding an extra $30,000 onto a $400,000 home loan can mean paying as much as $19,321 more in overall interest. That’s more than half the cost of the car.
Making extra repayments is one way to combat this problem but it calls for an ongoing commitment to pay more than the monthly minimum repayment. Remember too, unlike our homes, cars rapidly depreciate in value so it makes good financial sense to keep interest costs to a minimum by paying off the vehicle as soon as possible.
The upsides of using a car loan
Using a separate car loan may mean paying more each month, and that’s largely because the debt is being paid off over a faster timeframe. However, the big advantage is that car loans have short terms, usually five years, so even though the loan rate may be higher than for your home loan, the total interest cost will be lower. This is an important consideration.
Car loans are also a lot more flexible than they used to be. Some allow extra repayments, and redraw may even be available. By using a car loan, you keep different debts separate to gain a clearer picture of your overall finances.
The key is to speak with your Mortgage Choice broker to know which is the right strategy for you – accessing home equity or using a car loan to fund your next car.
 Calculation based on rate of 3.64% (one of the lowest on Mortgage Choice panel) and term of 30 years using loan calculator at https://www.mortgagechoice.com.au/home-loans/calculators/home-loan-repayment-calculator.aspx