If you have equity in your home, then adding your car loan to your mortgage is a tempting option.
Car loans have higher interest rates and repayments to match! Buying a car on a mortgage interest rate is the smarter option, right?
Well, not always!
In most cases, it will actually cost you tens of thousands of dollars more to add a car loan to your mortgage if you repay that amount over the full 30-year term.
In this article, we will discuss when you should and when you should not add your car loan to your mortgage.
In This Post:
Why Use a Mortgage to Buy a Car
If you have ever compared mortgage interest rates to typical car loan rates, you’ll know that mortgages are much cheaper!
At the time of writing, a typical mortgage will be around 6% and a car loan upwards of 9%.
However, often adding a car loan to your mortgage will actually cost you a lot more in the long run!
So saving cost is not the sole motivation for using a residential mortgage to buy a car.
Lower Interest Rates
Yes, the interest rates are lower, but that doesn’t equal cheaper if you pay off the balance over 30 years.
A car loan is typically around five years. While the annual cost is higher, it also forces you into the discipline of accelerated repayments.
While a mortgage doesn’t do that, it can save you a lot of money if you are able to impose that self-discipline.
Low Repayments for Better Cash Flow
For many borrowers, the long-term cost of using a mortgage is less important than taking pressure off the family budget in the short term.
When comparing the repayments on a car purchase over a 30-year loan term to a 5-year term, the difference is huge!
With recent increases in the cost of living, many have opted to retain flexibility in their budget and go for the lowest minimum repayment possible.
They can then choose to increase their payments as budget pressures improve.
Let’s consider the following example on a $30,000 car loan at 9% interest, and how the repayments compare to a mortgage at 6% interest.
As you can see, the repayment is over 70% cheaper month to month and could relieve a lot of pressure from a household budget.
The catch is that over the life of the loan, you will repay an additional $27,386.42 over the 30-year mortgage term.
Maximise Borrowing Capacity
A really expensive car is far more attainable if you are repaying the borrowed amount over a longer time period.
Let’s consider the repayments on a luxury $100k vehicle. Even with a borrowing term of 7 years, and a low interest rate (for a car loan) of 7%, the repayments are still $X <insert figure>.
If we compare this to $X if repaid over the maximum 30-year term of a mortgage.
One could afford the lower repayment on a far more moderate income when compared to the shorter car loan.
You can see how people get lured into the mortgage option when shopping for a new toy.
Consolidating Debt
Merging a car loan into a mortgage could also be part of a broader debt management strategy.
If you have a couple of credit cards, some BNPL accounts, a payment plan on the council rates, and a car loan, it can make life much easier to merge into one loan.
The lower interest rate and a single payment to make each month can save money and help retain the sanity of a borrower who may have become overwhelmed by a growing pile of debt.
How to Add a Car Loan to Your Mortgage
You can add a car loan to your mortgage through multiple channels, which is dependent on the features included in your current home loan.
The most common methods are as follows.
Release Home Equity
If you have either paid down your mortgage or your home has increased in value, you may have built up sufficient equity to cover the cost of a new car.
You have two options for how to structure the additional borrowings:
- Refinance your mortgage and increase the borrowings by the cost of the car.
- Get a top-up loan, which is a separate loan account with your home as security.
The best option for you depends mostly on how you plan to repay the loan. But more on that later.
Redraw Funds
If you have been making additional repayments on your mortgage, then you may be able to redraw those funds without having to go through a new loan application process.
If you have a redraw facility (not all mortgages do) you can withdraw funds almost instantly. If there is enough money available to cover the cost of the car, you could be driving away that afternoon!
If you are a little short, you may need to supplement the borrowings with a smaller car loan.
While a redraw is not an extra loan and you are just accessing funds you have paid in advance, it is still increasing the size of your debt for the purposes of buying a car.
It is just faster and easier from an administrative point of view.
Why You Should NOT Use a Mortgage to Buy a Car
I wanted to cover the negatives before encouraging anyone to use a mortgage to buy a car. The truth is that it leaves most people worse off over the long run.
People do it because it appears cheap, is easy to access, and they lack the financial discipline to make the system work for them.
Your Total Cost is Much Higher
The cost differential is due to the loan term and not the interest rate. In fact, paying a higher interest rate will save you money if you need a push to stick to a higher repayment.
Let’s revisit our earlier example, and this time account for the fees typically associated with a car loan. We will assume the mortgage is a drawdown and has no associated application fees.
| Costs | Car Loan (5 years) | Mortgage (30 Years) |
|---|---|---|
| Car Purchase | $30,000 | $30,000 |
| Application Fee | $750 | |
| Broker Fee | $990 | |
| Total Debt | $31,740 | $30,000 |
| Interest Rate | 9% | 6% |
| Total Interest Payable | $7,792.21 | $34,751.46 |
After accounting for the car loan fees, you will still be $26,959.25 better off by taking out the more expensive auto finance option.
This is an important consideration when deciding if you should get a car loan. If you would like to consider your options then get in touch with Gusto today.
Loan Term Exceeds Life of Car
You will get ten good years out of your car, potentially more if you look after it.
How do you feel about repaying the loan in the 20th year when you no longer have the car?
Realistically, you are unlikely to be thinking about these repayments in 20 years. But they will be there if you just add a car loan to your mortgage.
Why You Should Use a Mortgage to Buy a Car
You Can Maintain Car Loan Sized Repayments
The best way to make this system work for you is to borrow using your mortgage but repay within the five years of a regular car loan term (or faster if you can manage).
This allows you to access the best of both worlds!! The cheapest interest rate you can get, the fastest path to repayment, and the lowest cost to do so.
What’s the catch? You need the discipline to stay consistent when you are not required to.
However, if you can afford the repayment, you can just set this up as a recurring transfer on the day you get paid.
Then forget about it for the next five years!!
You’re Planning To Sell Your Property Soon
If you are selling your property soon and would be using the funds to buy a new car anyway, then you will do little harm by borrowing in advance of the planned sale.
When redrawing funds for the car purchase, it will cost you nothing.
If you access a top-up loan or refinance, you may need to pay a delayed establishment fee if you are paying out the loan within the minimum time to be exempt.
Minimise Financial Stress
The thing with mortgage payments is you get used to them pretty quickly.
If you just want to set and forget, and put minimal strain on your household finances, then the longer-term commitment of using a mortgage could make sense for you.
The cost is spread out so much that things like inflation and wages growth with erode the value of the extra cost anyway.
The impact on your lifestyle could be so small that you never think of it again.
Conclusion
Whether it is a good idea to add a car loan to your mortgage depends on what you prioritise most in life.
If you lack discipline but still want to minimise cost, then a car loan may still be best for you despite the short-term expense.
A more relaxed approach is to roll it into the mortgage and let time do its thing.
And for the more sophisticated and disciplined people out there, you can pursue the hybrid approach – use the mortgage for the car loan but make bigger repayments.
