Many home owners believe that using their home equity to purchase a new car is a great solution because they don’t have to apply for a personal loan and their mortgage repayments stay the same. So it actually feels as if you are getting a free car!
Using your equity is so easy and convenient that many home owners don’t think twice about adding the purchase price of a car or even a holiday to their mortgage, but this is short-term thinking that can result in long-term problems. So let’s look at the issues with using your home equity for large purchases.
Overall mortgage costs
Even though mortgage rates are at an all-time low at the moment in Australia, remember when they were close to 20% in the late 80s? Just imagine adding another $50,000 to your mortgage to buy a new SUV and how difficult that might become when (not if!), the rates go up again. Of course, they might never reach such heights again, but paying off your mortgage makes much more sense when rates are volatile, than adding more just to buy a car.
Additional fees
It’s not always a cost-free option when you want to use your equity to make a large purchase, such as buying a new car. Sometimes your bank makes you pay additional fees to increase your mortgage or might even make you refinance the loan. This is particularly relevant if you have a fixed loan, so you need to be very careful and check into any additional fees that you might be required to pay to your lender.
Extending the life of your mortgage
If you add a substantial amount of additional debt to your mortgage, you will invariably extend its life and take longer to pay it off. This is a problem that most home owners don’t consider and is a very real outcome, particularly if you don’t increase your repayments to counter the additional debt.
It’s not all about streamlining payments
Some home owners believe that making one repayment makes much more sense than making one payment to a car loan and one to their mortgage. Well, if you have read points one and two above, you should have realised by now that this is not the best option. More often than not, taking out a car loan separate to your mortgage is often the better financial option. This is true even if you hope to pay more on your mortgage to pay off the ‘car loan’ in a few years.
You pay for the car forever
When you add the cost of a car to your 30 year mortgage, you are in reality, paying off that car for the next 30 years. Even when you sell the car, most people don’t transfer that money to their mortgage to pay off the ‘car loan’, instead they buy another car. It makes far more sense to borrow the money for your new car via a personal loan that can be paid off in 3 to 5 years, leaving you free and clear with no additional long-term debts.
Should you sell your car?
Quite often, when a home owner has added the price of their new car to their mortgage, they become reluctant to sell it and upgrade. This is because of the reason stated above, where home owners feel that they will still be paying for the car even after selling it and buying another car. So because they didn’t take out a proper car loan and pay it off in 5 years, home owners are reluctant to sell and end up stuck with an aging car.
For highly competitive car loans, call National Finance Solutions on 1300 13 50 50 or get an online quote today.
