Things to consider when using your home loan to finance your next car

On the surface it may seem the better deal in financing a vehicle purchase may be in securing a lower interest rate and attaching it to your home loan; however, it pays to take a step back and do the numbers.

The ease of accessing a redraw facility on the mortgage and paying the associated lower interest rate may seem both attractive and easy, after all you will still only have to manage one loan and repayment.

However, sitting down to work out the real costs may reveal a nasty surprise. The following example shows you why.

Jane and Greg have two cars: one 10 years old and one six years old. They’ve decided to trade in the older vehicle and upgrade to a new vehicle.

The cost of the car they are purchasing is $30,000.

Their first option is to take out a five year personal loan at 10% (to purchase $30,000 car).

The fortnightly payment will be $294. In five years’ time they will own the vehicle outright—paving the way to upgrade their second family car.

In total, the interest they have paid for the car loan over a 5-year period is estimated to be $8,179.

Their second option is to draw down on their $500,000 mortgage, taking their total mortgage to $530,000. They have 22 years left on their 25-year mortgage, which is a variable loan at 5.2%.

Before bundling in the debt against the vehicle their fortnightly repayments are $1,470. In total they will pay $340,578 in interest on their mortgage.

The debt Jane and Greg will owe when adding in the vehicle will be $530,000 on their three-year-old mortgage. Their new repayments will now be $1,558 each fortnight for the next 22 years. The total interest they will pay over the life of their new loan is now $361,553.

Bundling the vehicle into the loan adds around $21,000 in interest to the mortgage, compared with the fit for purpose car loan interest total of $8,179.

In these circumstances, where Jane and Greg make the required mortgage payments and no more, they are $12,821 worse off than if their vehicle loan was maintained separately—money that could help meet the costs of upgrading their second car.

In some circumstances—if you have the funds and the discipline, and if your living circumstances remain constant—you may be able to reduce the interest burden.

In this scenario, an extra $100 a month over 22 years will offset the interest of the car loan. Bear in mind, this monthly additional payment totals $26,400 over the life of your mortgage, in combination with the extra $200 plus monthly in their topped up payments.

What should you consider when determining how to finance your new vehicle?

• How often do you upgrade your vehicle? If you buy a new car every five or so years it may be that over the life of your mortgage you will have had four vehicles. Can you afford to place this pressure on your mortgage?
• How many other financial commitments or loans do you have? Perhaps the better option is to roll high interest credit card debt into the mortgage, and focus on managing your vehicle debt separately.
• Do you have the financial buffer and income certainty to boost your mortgage payments each week? During the life of a mortgage you may have times where employment and family situations change, which may place pressure on the budget and repayments.
• Do you plan to start a family or have another baby? Plans for a family may be five years down the track; however, rolling the car debt into the mortgage means you have a decades long repayments to consider.
• Are you disciplined with your budget and commitment to extra repayments? It can be tempting to redirect the extra cash towards holidays or large ticket items. Do you have a proven history of making the difficult choices?
• Do you use your car for work purposes too? If driving your personal vehicle is part of your job there are taxation offsets you may be entitled to.

How to decide which is the better option for you?

After calculating various scenarios and asking yourself the hard questions the best choice for you may seem evident. Even so, we each have varied and sometimes complex circumstances to account for. Seeking the advice of a professional is encouraged.

Looking for the best fit to finance your next car? Since 1964 UniBank has been offering low cost competitive products to employees, students and graduates in the university sector.

If you are a current or retired tertiary employee, a graduate, post-graduate or current student at an Australian university–and citizen or permanent resident, or a family member of an existing member of the bank–you can join the Bank.

UniBank car loans¹ have no ongoing fees and have features including the ability to make extra payments and no penalties for early repayments. You can also finance accessories such as car navigation systems, insurance and security within your loan amount.

1 Membership eligibility applies to join the Bank. All applications for credit are subject to our responsible lending criteria.
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