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?
There are many finance options available to help purchase a car such as leasing, personal loans or using a line-of-credit facility.
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.
Hi,
I have a $350,000 mortgage and paying an extra $150 a week on it.
We have now though just got a car loan worth $11,000.
Am I better off to keep paying the extra on the mortgage or pay it on the car loan to pay that off as quick as we can?
thanks
Hi Dean,
Thanks for your question.
Please note that finder.com.au is an online comparison service and is not in a position to be giving financial or personal advice.
There are a few different methods for paying down debt:
- Paying off the portion with the highest interest rate
- Snowball method
Depending on the type of home loan you have, there may be fees for paying out your loan early.
All the best,
Shirley
I currently have a car loan, but want to buy a house. Problem is i can’t afford the repayments of both. Is there a way that i can include my current car loan into a home loan some way? That way i could afford both.
Thanks for your help
Hi Kane,
Thanks for your question.
Please note that you intend to include the outstanding balance of your car loan into your home loan, you could end up paying more interest because you’re extending the loan term of your car loan.
In this case, it might be best to speak to a mortgage broker, as they’re home loan experts who can help you find the best loan for your situation.
Cheers,
Shirley
Hi,
If just say I have a loan of $100,000 on a house and then I decide that I want to refinance to buy a car and take out another $20,000.
The place is used as a Investment property so I assume that the $20,000 is not tax deductible?
Am I correct as I don’t want the tax man knocking on my door asking for money/fines.
Hi Josh,
finder.com.au can only provide general and factual advice.
For personal tax enquiries, please speak to your trusted accountant.
Cheers,
Shirley
Hi there, thanks for the article! I have question regarding my particular situation:
I bought a house, paid in full, in cash. It is paid for. My mother is recommending that I refinance the house to buy a car among other things. She says this is a good way to obtain the money for a nicer car than we could otherwise afford (not much nicer, but for example a NEW nissan versa or leaf if we go eco-friendly, instead of a used one with a lot of miles on it). I, however, am worried, and wanted to get a second opinion. (Don’t tell her, haha). In my mind, taking out a second mortgage on a home which is already paid for doesn’t quite make logical sense, although she says it can be done and is done often; I don’t want to have to pay for my house again, when it is already paid for in full. The value of the house has also gone up significantly since I first purchased it, as we did quite a bit of remodeling, etc., so wouldn’t a new mortgage be at the cost of the NEW value of the house and not the original cost we purchased it for (less than 2/3 the current value)? That said, is it really worth the stress of having to pay the extra interest payments incurred? Will this be considered debt that counts against me or in my favor on my credit report?
I appreciate your time and consideration!
Also, I am in the US not .au. Just a heads up, info-wise…Thanks again.
Hi Erika,
Thanks for your question.
Unfortunately we can’t be much of a help for general advice outside of Australia. You may want to consult this with a financial planner instead.
One thing you may want to compare is the repayments from refinancing your property to the repayments from a separate car loan. Also look out for things such as the comparison rate and fees, as these may give you a clearer idea of how much the total cost of the loan may be.
Cheers,
Shirley
what is the process for car loan to purchase.
Hello Pooja,
thanks for the question.
A car loan usually works by you applying for the specific product you want, getting your funds and then purchasing your car. Some loans will grant a sort of pre approval so you can go shopping and know that your bank will finance you for it. If you have any specific questions about how a particular loan product please let me know.
I hope this helps,
Marc.
Hi
I have a question about using my redraw facility on my home loan.
I am wanting to purchase a new car and would need to access roughly $20,000.
My mortgage was split initially as half was variable and the other half was fixed. Both are now variable.
I have always paid extra into my loans every fortnight for the past 5+ years.
Currently my combined fortnightly minimum payments are $540, owing on $147,000 at 5.22%pa and I pay $900 fortnightly and have done so since the day I took out my loan.
My question is in regards to treating your redraw amount as a 5 year loan, you say to calculate what this amount would be and pay that amount extra into your loan, so as to not pay it off over the lifetime of the loan. So does that mean paying the extra amount on top of my $900 that I’m accustomed to paying? Or paying the extra “car amount” on top of the minimum amount which is $540?if it is the latter I would have no problem in doing this as I already pay way above this amount anyhow, so would it in effect make little to no difference to my interest payments?
I just don’t want all my hard work over the last 5 years to go to waste but at the same time I think I deserve a little reward for all my hard work!