How to use your home loan to get you a new set of wheels
Interested in a new petrol-guzzler or environmentally-friendly vehicle but not sure how to pay for it?
Refinancing your home loan or leveraging the right features could be the answer, but there are some things you should be wary of before taking action.
How can I use my home loan to fund a car purchase?
In this article, we’ll look at how you can use your home loan options like redrawing or refinancing to buy a new car.
Option 1: Dip into your redraw
Before you consider refinancing your mortgage, you could try using a redraw facility if this is offered with your current home loan.
If you’ve been making extra repayments on your home loan, some lenders allow you to withdraw this surplus money, or ‘redraw’ it. Supposing you’ve made enough extra repayments, you could redraw this money and use it to buy a car.
This is usually a quick process because there’s no need to reapply for anything and you won’t get stung with a higher interest rate like personal loans because it’s your own money. Instead, you'll have lost the benefit of the extra repayments - namely that of a buffer and a quicker payout of your loan.
Many home loans today have a redraw facility to enable you to access the funds that you've made in additional repayments. However, different loans will have different conditions - such as fees for redrawing, maximum redraw amounts or fees for having a redraw facility- so it’s best to check with your lender first.
Option 2: Consolidate and refinance
Another way of using your home loan to purchase a car is to refinance your mortgage. This means you either refinance with your existing lender by negotiating a better rate, or you switch to a new lender to take advantage of different features or service- both of which can help you access funds to buy your new wheels.
If you refinance with a new lender, your property may need to be valued again to help the lender determine how much you can afford to borrow (if you want to increase your loan amount).
The main downside to adding the cost of the car to your new home loan is you’ll be stuck paying the car debt over the full term of your home loan. If you refinance to buy a car and keep paying the same repayments each month, on a $25 000 car at 6.78%, you’d pay a whopping $20 728.92 in interest by the time you paid off your home loan.
This means your average-priced car actually ends up costing you $45 728.92.
The best way to treat a refinance for your car is to treat it as if it’s a five year loan. Calculate what the repayments would be over five years at the same interest rate as your home loan and then add this to your home loan in the form of extra repayments each month. If you make a
If you make a conscious effort to make additional repayments on your loan, then refinancing to help fund a car purchase can make financial sense.
Benefits of refinancing
Refinancing can bring several benefits, such as:
- Lower interest rates. You can stand to benefit from lower rates, or the opportunity to fix a competitive rate for a number of years which can lower your repayments over the life of your loan.
- New loan features. Features like an offset account or redraw facility may not be offered with your existing mortgage which is why many borrowers switch to a new lender to take advantage of features that will help them manage their home loan.
- Better service. If you're not satisfied with the customer service provided by your current lender, then it may be time to refinance to a new bank.
However, it's important to realise that refinancing can be expensive and it can also add years to your loan term so make sure you speak with an experienced mortgage broker before initiating the refinance.
Using your home loan features or refinancing to a new lender could be a good way to help purchase a new car, but make sure that you carefully consider the risks and costs associated with the refinance to ensure that it's the right move for you.