Many home owners believe that using their home equity to purchase a new car is a great solution because they don’t have to apply for a car loan and their mortgage repayments often stay the same.
It’s easy to think a mortgage top up is cheaper than car finance
If your new car costs $30,000 and added to the mortgage at 4.99% over a 30 year term. When you take into account compound interest over the term as opposed to the longest car loan term of 5 years, it can increase your total payments to over $29,000, even though the interest rate is a lot lower.
Why you shouldn’t put your car loan on the mortgage
Many home owners don’t think twice about adding the purchase price of a car or even a holiday to their mortgage, but this is short-term thinking that can result in long-term problems.
#1 Cars don’t go up in value
A car is not an appreciating asset unlike your property, so you will never get the extra money you pay back.
#2 You’re in debt longer
The loan term really matters to the total amount you pay and banks want you to be in debt longer as they earn more.
#3 Additional fees
It’s not always a cost-free option. Sometimes your bank makes you pay additional fees and refinance the loan.
#4 Stuck with an aging car
Home owners feel that they will still be paying for the car for years after selling it, so they often do not upgrade.