If it’s time for a new set of wheels, you might be looking into your finance options to fund this expensive purchase. When searching for a new car loan, you would have likely noticed that the interest rates are higher than the interest rate on your home loan.
This might raise the question - “can I put my car loan into my mortgage?” - and the short answer is yes. But it’s a little more complicated than just rolling it into one payment.
When considering using your home loan to purchase a new car, there are three main options you can consider: you can use a redraw facility, refinance to find a better rate, or consolidate your home loan and car loan (and potentially other debt).
If you’re wondering how to use home equity to buy a car, redrawing is your answer. By making additional mortgage repayments, you accumulate more of what’s known as ‘home equity’. Home equity means you essentially own more of your home, and as a result, owe less on your home loan.
Redrawing from this amount is usually a fast and easy process that doesn’t involve reapplying for finance, which is involved in the other two options. However, there are still some other things you might want to consider.
Redrawing is essentially like borrowing back the extra money you’ve paid towards your home loan. This means you’re somewhat undoing all the hard work of making more home loan repayments. Making extra repayments can take years off the life of your loan, which can reduce the amount of interest you’re required to pay.
This can end up slicing thousands off the total amount you pay back. Redrawing could mean that you’re missing out on these savings, your mortgage will be longer, and you’ll inevitably own your home later. Plus, accessing a redraw facility can sometimes accompany fees, and there might be a capped limit on how much you can access (so it might not cover the cost of your new car anyway).
Another option you could consider is refinancing your home loan to find a better rate, and using the difference to pay off your car. You can look into refinancing with your current lender, or you could switch to a lender with a better offer. Refinancing for this reason (using a lower home loan interest rate than a car loan interest rate) has its benefits.
As well as a lower interest rate, you don’t need to worry about making two separate repayments. But it also means you will most likely pay off your car over a much longer period of time that you would using a normal car loan. This could mean that over the entire life of the loan, you pay more in interest than you would have with the higher interest rate on a car loan.
One last option you could consider is consolidating your mortgage and car loan into one using a consolidation loan. Consolidation is often confused with refinancing, as the process is similar. To understand the difference, it can be thought of like this: all consolidation involves refinancing, but not all refinancing involves consolidation.
Refinancing can often involve just one debt, like a mortgage, which doesn’t involve consolidation. You cannot consolidate a single debt, but you can refinance it to find a better rate.
If you choose to consolidate your home loan and car loan, you can also add in any other outstanding debts you might have. This could include credit cards, utility bills, personal loans, or other credit you’re currently paying off.
This can simplify things, but it can also accompany additional exit fees/application fees for each debt you add to the new loan. So you might want to do some calculations before submitting that application.
If none of these options sound like they’re very suited to you, there are some other options you could choose to consider to purchase a new vehicle.
While the luxury of a brand new car can be very appealing, they are typically much more expensive than used cars. Unfortunately, cars depreciate at a much faster rate when they’re brand new. If you purchase a used car, you could likely save yourself thousands of dollars. “Used” doesn’t necessarily mean “old” - there are many used cars that limited kilometers logged, but they’re significantly cheaper than fresh out of the dealership.
Whether you’re already paying off a car loan or you’re searching for a new car loan, you can always try to find yourself a better agreement. This could involve choosing a car loan with a longer term, for example a seven year term instead of a five year one, to make the repayments less in the short-term. While you might end up paying more interest this way, you will likely pay less than you would rolling it into a 30-year mortgage.
If paying your car loan and home loan at the same time is the most convenient option for you, you might be able to pay off the car earlier by making extra mortgage repayments. Potentially, after you’ve put your car loan into your home loan, your lender could allow you to put the extra amount borrowed into a sub-account. This can make it easier to see how you’re going paying it off over time, and you can aim to pay it off in a similar period you would a regular car loan.