Can I increase my home loan to buy a car?

If the time has come to upgrade to a new set of wheels, but your savings won’t quite cover the purchase cost, you might be wondering whether you can use your home loan as a car loan to access a lower interest rate.

It makes sense to want the lowest rate that’s available to you. Often, even the most competitive car loans will still have higher interest rates than your home loan. This is because car loan terms are typically more than 20 years shorter than home loan terms, and the lender needs to earn some return to provide you with financing. Plus, cars typically depreciate in value over time, whereas homes are generally more likely to increase in value over time (though it’s not guaranteed). This makes your car loan a bigger potential risk to the bank than your home loan.

There are a couple of potential options available if you’re interested in using a home loan to buy a car: 

1. Use your redraw facility, or;
2. Refinance your home loan to access additional funds.

It’s important to understand the potential risks of either option before adding a car loan to your home loan. 

How can I add a car loan to my home loan?

Redraw

If you’ve been making extra repayments on your home loan that add up to the purchase cost of your desired new vehicle, you could potentially redraw these funds from your home loan account to buy the car.

If your home loan offers a redraw facility, this could be a reasonably fast and easy process that doesn’t involve reapplying for finance. It would also mean that you’ll avoid having an additional loan repayment to manage.

The biggest risk of this strategy is that you are essentially undoing the hard work you put into making extra repayments on your home loan. Extra repayments may shorten your home loan term by a number of years, reducing your interest charges over the life of the loan. If you redraw to use your home loan to buy a car, you’ll miss out on these savings, which can cost you more money in the long run and prevent you from owning your home sooner.

Also, keep in mind that even if your home loan offers a redraw facility, you may be charged a fee for redrawing funds, plus there could be a limit to how much you can redraw.

Refinance 

Your second option is to refinance your home loan to access additional funds to buy a car, sometimes known as a home loan top up. You could do this with your current lender, or switch to a new lender to potentially get a more competitive rate. 

Put simply, you will refinance your mortgage and increase the amount you’re borrowing to include the value of your desired car. The car loan you would have taken out is essentially added on top of your mortgage, and you will just keep making repayments on your home loan to cover it. Topping up your mortgage like this to buy a car is similar to refinancing your mortgage to consolidate debts.  

While using your home loan to buy a car like this will let you benefit from your home loan’s interest rate instead of a likely higher car loan rate, keep in mind that it also means you will be paying off your car over a much longer period of time. Home loan term lengths are routinely measured in decades, so there’s a good chance you’ll still be paying off your car when the time comes to upgrade it again.

Despite the potential to access a lower interest rate with a home loan top up, the considerably longer loan term will likely mean paying thousands of dollars more in interest charges over the life of the loan. And as cars tend to depreciate in value, the longer you’re in debt, the less value for money you may be getting from your loan.

Alternative options to buy your next vehicle

Using your home loan to buy a car may not be the best option for every Australian. If you’re interested in keeping your overall repayment costs down without potentially adding a substantial amount to your long-term interest charges, consider these alternatives:

Buy used

Brand new cars depreciate in value at a steady rate, meaning buying second-hand could save you thousands and allow you to take out a smaller loan.

Choose a car loan on a longer term 

If the cost of your immediate repayments is your biggest worry, you could reduce them by opting for a car loan with a longer loan term, such as seven years instead of five. Even though this typically means paying more interest over the life of the loan, it is still much shorter than an average 25-year mortgage.

Use your mortgage, but increase your repayments 

If you are still interested in consolidating your mortgage and car loan, you could do your calculations and consider making extra repayments that will pay your car off over an average car loan term.

Some home loan lenders will even allow you to put the amount you borrow for your car into a sub-account, potentially making it easier for you to ensure you pay it off within around five years.

For advice specific to your unique financial circumstances, consider reaching out to a financial advisor.

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