Should you use home equity to finance your next car?

If you’ve owned your home for a decent period of time, or you’re ahead on your mortgage repayments, then you can potentially use some of the equity to purchase assets such as a car.

While this might be a good option for some, it’s worth weighing up the advantages and disadvantages of using your home equity on a new car.

Advantages

Convenience

One of the main reasons people use their own equity to purchase a car is because it can be quick and easy.

If you've got a redraw facility attached to your home loan, then withdrawing money can be as simple as logging into your internet banking and making a transfer. In contrast, finding a lender, getting all your documents together and applying can take some time, especially if you’re not working with a finance broker.

Interest rates

For the most part, interest rates on car loans are always going to be higher than those on a home loan. In the short term, this might mean you’re paying less interest on the money. However, it is worth considering the length of time you’ll be borrowing the money.

Disadvantages

Time

If you intend to pay the car portion of the loan back over 30 years, the interest payments can really add up compared to a typical car loan that might run over only 5 years.

For example, redrawing $30,000 from your mortgage, at an interest rate of 5 per cent, could end up costing you more than $50,000 in extra interest over a twenty-year period. This means the total cost of your vehicle could work out to be over $80,000 if you don’t pay off the car portion of the loan quickly.

Bad money habits

While it’s nice to have a redraw facility, using the equity in your home on depreciating assets isn’t always sound financial practice. It might be better to keep the equity in your home loan for other investments, or to simply keep paying down your mortgage. This will depend on your personal circumstances.

No redraw facility

If you don’t have a redraw facility attached to your home loan, then you’re likely going to have to go through the process of reapplying for a loan with the same or another lender to try and access the equity. In this event, it might be best to simply apply for a car loan.