04 Feb 2022

There is no denying that cars have become a necessity for most people and more than a mode of transportation. Much like fashion, cars are often used as a vehicle to express their owner’s identity, can carry significant emotional attachment and quite often a symbol of one’s success – whether it be real or manufactured. After all, a young person’s first major rite of passage is securing their driver’s license.

However, cars are not a great wealth generation or preservation tool, particularly when you choose to buy one on finance. The next time you think about securing a loan for your next car, consider the following points:

You can’t live in your car

Your capacity to borrow to purchase a home or refinance to a better deal may be hindered greatly if you are carrying a car loan. The often-high interest rates attached to car or personal loans will weigh heavily on your ability to service a mortgage debt. And obviously the higher the loan amount the less you will be able to qualify to borrow for a home loan. In fact, in the case of loans attached to luxury cars, it is not uncommon for the owner to be paying the equivalent as an average per month mortgage repayment.

The solution? In an ideal world one would pay cash for a car but with the cost of living nowadays, it’s not always easy to save for one or you may have to upgrade at a moment’s notice if your vehicle becomes unfit to drive. If you do need to borrow for a vehicle but expect to be taking out a home loan in the foreseeable future, proceed with caution and be conservative with your car purchase. Better yet, check with your mortgage broker first and determine how a new car loan will affect your capacity to take out a mortgage.

Cars are a Depreciating Asset

It’s suggested that on average, a new car will depreciate around 10% the moment it is driven out of a car yard. So, if you are purchasing a $30K car, as soon as you get behind the wheel, you have just spent $3K for the privilege. That better be one heck of a car ride home!

“Some people love the new car smell, to me, it smells like burnt money” Anonymous

You can also expect the car to depreciate 25% of the value in the first year and nearly 50% in the first three years. When you borrow money to purchase a car you are not just paying for the cost of the vehicle itself but also interest so unlike a home loan where you are paying to borrow for an asset which hopefully is increasing in value, where cars are concerned you are paying more for the privilege of borrowing for a depreciating asset.

Borrowing against your mortgage for a car can cost you more

Recognizing that car loans carry a more expensive interest rate, often mortgage holders choose to take out a new facility against their home to finance its purchase, figuring a lower interest rate will mean it will be more cost effective.

It can indeed be more cost effective if you don’t fall into the trap of choosing an extended term like you would with a home loan. This means, keep the loan term the same as it would be with a car loan, that is, five years. If you make the term, say, 25 years you will be likely to pay incredibly more interest, even though the loan repayment is conveniently low.

For instance, $30K at 3% over five years would cost you in total $32,344 with $2,344 interest payable. Conversely $30K at 3% over 25 years will cost you $42,679 with $12,679 payable in interest. So, the lesson here is, yes, it’s possible to use your mortgage for a car finance but structure it correctly, as to do otherwise means you will pay more, not to mention eat into your equity position which may also hold you back from doing other things.

We know that car loans are a fact of life, we get that. However, it’s painful delivering the news to potential clients that they are unable to pursue their dream of purchasing a home simply because their car loan is holding them back. Our suggestion is always having a chat to your mortgage before you intend on taking the plunge with a new car loan, as looking at its broader effects may make you revisit your thoughts on what you really need to drive to work in.


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