The pros and cons of using a home loan to buy a car
When buying a new car, using home equity rather than taking out a car loan can be a simple way to save money.
The average Australian household spends $165.95 per week on car loan repayments, almost half of the household's weekly transport costs, according to the latest Australian Automobile Association data on transport affordability. Those transport costs are 14.9% of the household's total income.
But by financing a vehicle purchase through their home loans, buyers can take advantage of lower interest rates so that a smaller chunk of that household income is going to car repayments.
The average interest rates for secured car loans are 6.75% for a new car and 7.29% for a used car, with an average application fee of $220. Those interest rates are more than double the average home loan interest rates paid by owner-occupiers.
It's worth looking into using your home loan to fund a new car purchase – weighing up potential savings and the convenience of rolling a car and home into the one repayment each month.
Here are a couple of other points to consider.
Stick to a car loan schedule
If you use your home loan to fund the purchase of a new car to save money, it's best to make additional repayments to ensure you are paying off the loan in the same time period as you would usually pay off a car loan, not in the length of a home loan – for example five years instead of 20 years.
Otherwise, while you may be paying a lower interest rate, if you spread out the repayments over the years remaining on your home loan, you may end up paying more interest in total.
To fully reap the rewards, create a set term to repay the car loan by and ensure you are able to make extra home loan repayments without penalty. Some lenders, homeloans.com.au included, also allow you to divide your loan into separate accounts.
Put the car loan amount into one sub account so you can track your progress, set yourself a goal to pay it off in a set time period, and start planning how you'll reward yourself when that portion of the loan is cleared.
Note: Before considering accessing your equity, seek professional advice. As you will be increasing your debt, you will be exposed to higher risks. An accountant or financial adviser can give you expert advice about what options will suit your own personal situation.
Other ways to save
Dealer demonstrator cars are a simple way to shave thousands off the price of a new car. They're generally very well maintained, dealer-serviced and have only been driven a few thousand kms, and many have a good range of extras included.
When you're wheeling and dealing on the lot, push for any extra warranties and servicing you can – it has, after all, been driven – but the right timing could mean you find the new car you were hoping for at a better price than you expected.
Considering releasing equity in your home loan to finance a new car purchase? Speak with your broker.
This material has been prepared for information purposes only. This should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to determine how this information relates to your own circumstances.