Buying a house requires most people to take on the largest debt they will ever have to repay. It also requires lots of saving and paying down debt just to get approved!
Once that is taken care of you now have the freedom to take on additional loans without the consequence of preventing home ownership.
Will you be approved for a car loan after taking out a mortgage? The short answer is yes if you can afford the repayments.
In this article, we will discuss the timing of your car loan application, whether you are better off borrowing within your mortgage, or if there is an optimal structure to save you the most money.
In This Post:
Timing Your Car Loan Application After Buying a House
Considering you will be paying your mortgage for 30 years, there is a lot of time after buying a house where your finances will be affected.
So let’s get much more specific on the timeframes after buying your house.
During the Settlement Period
Once you sign an unconditional contract of sale you still have 5-6 weeks until the settlement date in most cases.
The big risk here is that you do something that could prevent your mortgage from being settled on time.
However, if you have an unconditional mortgage contract you should be ok to consider additional financial commitments without it affecting settlement.
Unless the need for a new car is urgent you may be better off waiting until the property settlement is completed before seeking additional finance for a car… Just in case!
Post Mortgage Settlement
Once your mortgage is officially settled then there is nothing holding you back.
You can now make a fresh assessment of your finances and how much debt you are comfortable taking on to buy your next car.
The timing of your property purchase is largely irrelevant to your car loan eligibility and other factors will be more influential.
How a Mortgage Impacts Your Car Loan Eligibility
Your car loan eligibility will be impacted by the same variables as any other assessment for auto finance.
The only difference is that you have mortgage payments to consider as part of your household budget.
Capacity to Repay
The amount of disposable income you have after paying your mortgage, other living expenses, and any other debts will determine your borrowing limit for a car loan.
Some people find themselves allocating a large portion of their income to mortgage payments in the first couple of years after buying a house.
This could limit your repayment capacity to a smaller loan only.
However, if you have borrowed well within your means for your mortgage then this may not be an issue at all.
Another consideration is that mortgage lenders apply an interest rate buffer to your loan assessment. You may be paying 6% interest, but assessed at an 8% to 9% interest repayment.
Car loan lenders are much more forgiving in their credit assessment and you may find a much more favourable outcome than you expect.
Credit Score
The impact of a mortgage on your credit score can vary depending on the events leading up to settlement.
If you submitted multiple loan applications and were declined by some lenders along the way, your credit score may have taken a hit.
However, if you submitted one application, was approved, and now settled with repayments coming in then your credit score may have actually increased!
The different scenarios above highlight how important it is to have a broker working for you whether that is for a mortgage application or car loan.
Selecting the best lender first time can help you avoid any damage to your credit score through multiple unsuccessful applications.
Lender Risk Factors
The final influence on your car loan after taking out a mortgage is how a lender will treat your new situation.
Every lender has different rules for how they assess risk. Some may view your new asset position (property owner!) as a positive, whereas others may be neutral on this point and it will make no difference at all.
Rarely will it harm your eligibility for a car loan.
Should I Just Increase My Mortgage to Buy a Car?
You may prefer to just increase your home loan to buy a car. The interest rate will be cheaper and the loan repayments lower.
But will this actually save you money? Often the answer is no, but it doesn’t feel that way.
So the banks love it when people do this!
To fully understand the numbers, let’s consider the following scenarios.
Cost Comparison
For this cost comparison, we will assume a $30,000 car purchase.
The fees and interest rates used are for the example only and would vary slightly depending on the lenders involved.
Scenario 1 – Increase Mortgage
- Interest rate: 6%
- Mortgage top-up fees: $300
- Repayment term: 30 years
- Monthly repayment: $182
- Total interest payable: $35,099
Due to the long repayment period, you end up repaying over $35k plus the original $30,300.
Your $30k car ends up costing you $65k, and you will still be paying for it long after the car dies and is sold for scrap.
Scenario 2 – Separate Car Loan
- Interest rate 9%
- Associated transaction fees: $1,500
- Repayment term: 5 years
- Monthly repayment: $654
- Total interest payable: $7,733
This is a much more aggressive repayment schedule and will require an additional $472 per month in repayments.
However, the total cost savings are significant with the total repayments being just over $39k for your $30k car.
This is despite the higher interest rate and upfront fees. Your car will also have plenty of life left in it once the loan is repaid.
As long as you have the capacity for the additional repayments this option is a clear winner!
The Cheapest Outcome
For those who are more financially savvy, you may be thinking about a third option.
What if I top up the mortgage and make the higher repayments? Let’s see how that compares.
Scenario 3 – Top Up Mortgage + Car Loan Sized Repayments
- Interest rate 6%
- Associated transaction fees: $300
- Repayment term: 4 years and 5 months
- Monthly repayment: $652
- Total interest payable: $4,267
This is by far the superior option. The lower fees and interest rate mean a total cost of $34,567. Almost $5k cheaper than the car loan.
The real question is will you stay disciplined and make the higher repayments if you are not required to?
If the answer is no, then a separate car loan creates this division of resources allowing you to set and forget.
You have to be very honest with yourself when answering this question or it could be a very costly mistake.
Conclusion
Once your home loan has settled you can apply for a car loan, no problem.
You have assets in your name and a track record of responsible management of your finances. What lender wouldn’t see that as a positive?
The real question is how you should structure that loan to get the best financial outcome for yourself.
If you would like to see what your car loan options are and run through the scenarios above and how they apply to you then submit an inquiry below and our team will get to work.
