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If you’re currently paying off your mortgage and are in the market for a new car, you might be wondering whether you can use your home equity to purchase the vehicle instead of taking out a dedicated loan. Before you redraw on your home loan, it’s important to consider the pros and cons of doing so to help determine whether you should use your home equity to buy your car. You can find out all about it right here with Savvy, so read on to discover more!
Using equity to buy a car: how it works
It’s important to understand what the process of using equity to buy a car, sometimes known as taking out a home equity loan, actually involves.
First and foremost, there are several ways to access your home equity for a car purchase. The first is via a redraw facility, which allows you to draw from funds already paid towards your mortgage. While you can also refinance your home loan to include the cost of the vehicle in the new amount. Line of credit loans and home loan top-ups can also achieve this purpose.
Once you gain access to this, you’ll essentially add the purchase price of the car to your mortgage. This means your amount owed will increase and the percentage of equity built up in your home will temporarily fall. This added debt will then be repaid alongside the remainder of your home loan for the rest of your term.
Pros of using equity to buy a car
- Flexibility and convenience
Redrawing from your home loan is often a faster, more convenient way to access funds for your car than applying for a car loan. This can be done without reaching out to a new lender or broker. Depending on who your home loan is with, it may also be a faster process than completing a car loan application.
Additionally, the amount you can redraw is more flexible. This means you may be able to access cash for other, non-car expenses in the same redraw. Car loans are based on the value of the vehicle, but this isn’t necessarily the case for home equity purchases.
- Less impact on your monthly budget
Spreading out the cost of your car purchase with your home loan means the difference to your monthly budget is minimal compared to taking out a separate loan.
For example, if you have a $400,000 home loan to be repaid over 25 years at 4.50% p.a., adding a $30,000 car would only increase your monthly repayments from $2,223 to $2,390, which is a difference of $167 per month.
In contrast, taking out a separate $30,000, five-year car loan at 8.50% p.a. would add $511 to your budget, totalling $2,734 per month for the duration of your car loan term.
- Lower interest rates
Of course, the interest rates on home loans are among the lowest of all loan types. A car loan will typically come with a rate higher by several percentage points, or as much as 10% or more if your credit isn’t the best.
- No need to meet car lender requirements
When taking out a car loan, your vehicle acts as collateral for the loan. This means lenders will have a set of requirements that your car must meet, especially concerning its age and condition. However, because the funds being redrawn from your home loan are still using your home as collateral, you may have more options when it comes to the cars you can choose to buy.
Cons of using equity to buy a car
- Increased overall cost
It’s important to note that because your car’s purchase price is paid off at the same time as the rest of your home loan, you could end up paying much more interest on it than you would if you took out a car loan.
Using the example of a $400,000, 25-year mortgage at 4.50% from above, adding $30,000 to the mortgage would result in a total interest spend of $287,024. However, by taking out a $30,000, five-year car loan at 8.50% p.a., the total cost falls to $273,929. This represents a saving of over $14,000.
- Less convenient without a redraw facility
Much of the convenience comes from the ease with which you can use a redraw facility. However, if your home loan happens to not have one available, this avenue is shut off.
In this instance, refinancing your home loan is the most feasible option, which may not offer much more convenience than a car loan application.
- Depreciation of the vehicle
If you’re looking to sell your car in the near future, you’ll have to contend with depreciation. Cars, unlike property, drop in value the longer you own and use them. This means that the amount you pay for your vehicle is likely to be higher than the amount you sell it for.
Negative equity, where the value of your car is lower than your outstanding loan debt, is common in car loans and is an issue for those looking to sell while still under finance. However, with a car bought under a home loan instead of a car loan, you stand to lose much more money on interest if you decide to sell a few years into your purchase.
- Minimum home equity requirement
Whether you can access home equity at all will ultimately depend on how much you’ve built while repaying your home loan. According to Commonwealth Bank, lenders will generally only allow you to access up to 80% of the value of your home, less the amount outstanding.
This means that if your home equity sits below 20%, you won’t be able to utilise it to purchase your car. For example, if you had a $650,000 mortgage on a property valued at $800,000, your equity would be 18.75%, which wouldn’t be enough to access any equity.
Should I use equity in my home to purchase a car?
Ultimately, whether you decide to purchase a car using home equity comes down to your situation and whether the pros outweigh the cons (or vice versa). Managing Director of Savvy Bill Tsouvalas says it’s crucial to take the time to consider which option is best for you.
“Buying a car is a significant purchase, so surveying a range of options for financing it will always leave you in a better position to make an informed call on which is best for your needs”, he said.
“Adding your car purchase to your home loan is a long-term investment, potentially spanning the full length of your term, so it’s crucial to avoid rushing into decisions.”
If you decide to take out a car loan, you can compare a variety of finance options from leading Australian lenders with Savvy today.
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Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
