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Using your mortgage as car finance


Would you be better off to use your mortgage to finance a car?
 
With mortgage interest rates generally lower than for car finance you might be wondering how you could leverage your mortgage to buy your car.
 •Redraw
 •Refinance
 
Redrawing from your mortgage
 
If you're ahead on your mortgage repayments then you might have accumulated a 'nest egg' you can redraw to fund buying a car. There are both positives and negatives to consider before doing this.
 
Positives
 
Convenience - By using your home finance, you'll still have only one regular loan repayment to manage rather than two.
 
Speed - Depending on your lender, redraw can be organised very quickly. Unlike getting a loan from scratch you won't need to verify income or get credit checks.
 
Affordability - If you can't afford to allocate more money to making loan repayments right now (for example, if your a family has temporarily dropped to one income), redrawing from your mortgage could give you the flexibility to buy a car without increasing your minimum loan repayments.
 
Negatives
 
Cost - While the interest rate may be lower, the size of the debt and the effect of compound interest over time means you may pay more total interest by financing your car through your mortgage.
 
However, this extra interest could be offset by making extra repayments.
 
See the example below for an illustration of how this works.
 
Keeping track
If you like to keep your expenses separate so you can choose what you repay and when, lumping new costs into your mortgage will limit this.
 
An Example
 
The table below shows a simple comparison of a car loan (plus the costs of an existing mortgage) with mortgage redraw. This was done using a Loan Repayment Calculator.
 
Redraw A: After funds have been redrawn to buy a car only the minimum repayments are made on the home loan. The extra cost of the car, which is not offset by any extra repayments, results in an extra $11,500 in total interest on the home loan over the remaining 20 years of the loan.
 
Redraw B: By increasing home loan repayments after redrawing funds for the car, paying higher total interest over the life of the home loan is avoided.
 
 
 


Other things to consider
 •Your lender may charge a redraw fee (usually nominal), have a minimum redraw amount or specify you have a minimum equity in your home (eg, 20%).
 •If you haven't redrawn from your mortgage before, you may need to register or set up authorisation.
 
Refinancing your mortgage
 
If you're not in front on your mortgage repayments and don't have funds available for redraw, you could talk to your existing lender, or a new lender, about refinancing your mortgage to access the funds you need to buy a car.
 
This will probably take longer to organise than redraw. Your financial situation will be reassessed, including the value of your house versus the amount you want to borrow. This could include an inspection of the property by a valuer.
 
Positives
 •There might be flexibility to how you refinance - for example, lowering your repayments by extending the loan term (but this could also increase your total interest).
 •Depending on your loan (and how long ago you got it), you may also be able to get a lower interest rate or better features on current products.
 
Negatives
 •Your home lender may charge you a fee to refinance. This can be as high as $500 so is worth checking up front.
 •Your loan balance will increase. If you pay back the minimum repayments this will usually result in an increase in total interest charges.
 
Other things to consider
 •Most home loan providers have penalty fees for paying out the loan in its early years so keep this in mind if you are considering switching lenders.
 •There are a range of different refinancing options. Take time to consider exactly what your objectives are to ensure you end up with a solution that suits your situation more, not less!
 •If you refinance to borrow more than your initial loan amount stamp duty may apply.
 
TIP: If you're buying a car that isn't eligible to be used as security, you may also be able to use your home as security for the loan to lower your interest rate (although beware if you default on your repayments!).

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