If you have a long-term home loan and have been paying it off for a while now, you’ve probably built up equity in your home. That means you might own a significant portion (usually over 20%) of the house and can use that as an asset to use as collateral to finance other assets – investment properties, recreational vehicles or cars. Using your home equity to finance a car might sound like a good idea at first. But should you use your home equity to buy a car? Or should you go out and find a good car finance deal?
The number one reason why so many homeowners think of drawing on their home equity to buy a car is convenience. You won’t have to shop around for a lender or broker that specialises in car finance nor are there any intrusive credit checks or financial health check-ups. You simply redraw on your loan and pay back the amount with your usual repayments. In many cases, your repayment schedule and amounts will stay the same.
WINNER: Home equity
Home loan interest rates will always be lower than car finance interest rates. Due to the nature of the assets and their relative worth, that’s just a cold fact. However, this is like comparing apples and oranges, as you’ll find out.
In many cases, your bank or mortgage lender might impose a redraw fee when you take money out of your equity. These are usually in the mid-range of three figures. You must keep that in mind when you are redrawing before making a decision. Car loan fees are usually up front and calculated as part of your interest rate as a comparison rate.
WINNER: Car loan
Length of the loan
A home loan is a long-term business transaction that could last as long as 30 years. Financiers cap car loan terms at five years with a few select loans allowing you to extend beyond that. This means you only pay the interest on your car loan for those five years – not the remainder of your home loan. It’s impossible to separate your “car loan” from your “home loan” when it’s redrawn against your house. This means you’ll be paying more in interest than you ever would have with a separate car loan.
WINNER: Car loan
Financial impact and approvals
By keeping your car debt and home mortgage debt separate, you have a better overall picture of your finances. You’ll know exactly how much you owe each month without having to “guess” if your car has been paid off or not. Furthermore, your bank may not approve a redraw on your home equity if you don’t meet the minimum redraw limits. Car loan lenders work with individuals to find approval – even if they have no home equity. It’s worth talking to a financial professional for more information.