Refinancing Your Home Loan for a Car

January 11, 2018


One of the big bonuses of having a mortgage and responsibly paying it off is you can use your home loan to meet other financial goals – like buying that brand new car you’ve had your eye on for the past few months. Refinancing your home loan for a car purchase has plenty of advantages. You can use your low mortgage rate. By using your home loan, you can help to keep your financial accounts simplified. If you have other objectives in mind, like paying off your credit card debt, you may be able to refinance and cross several essentials of your financial things-to-do list.

Sounds like a triple-win situation. Before running to your bank to refinance your mortgage, make sure you take the time to learn about how the process works so you can decide if refinancing is your best bet for buying the car you want.

Can You Use a Home Equity Loan to Buy a Car?

Yes, definitely. A home equity loan, also known as a line of credit loan, will let you borrow against the equity you’ve built up whilst you’ve been paying down your mortgage. Just keep in mind, you can only borrow 80% of the loan to value ratio. If you want to save yourself the trouble of applying for an equity loan you may not qualify for, have a valuer come out to assess the current value of your property. With an accurate valuation, you’ll know how much you can borrow if you refinance.

How Can You Use a Mortgage to Buy a Car Without Refinancing?

You don’t necessarily have to refinance to use your home loan for your car. If you’ve been making extra repayments on your loan and you have a free redraw, you can redraw the extra money you’ve paid and use it to cover the cost of a car. This way, you can use your low mortgage interest rate to buy a car but you won’t have to worry about paying any refinancing fees. Not all loans have a free redraw facility so make sure you double check.

Can You Combine a Car Loan and a Home Loan?

When you refinance to a line of credit loan, you can roll your car loan into your home loan. If you already are paying off a car loan and want to combine it with your mortgage, refinancing is the way to do it. Or you can refinance and pay cash for your car.

One caveat to keep in mind; if you recently took out your car loan, you may want to wait until your credit score goes back up before applying for a new home loan. When you took out your car loan, one or more lenders would have done a hard pull into your credit, which can bring down your score temporarily.

Will You Pay More in Interest by Combining Loans?

On one hand, you’ll probably be able to get a lower interest rate with your home loan. Mortgage loans tend to be lower than car loans and dealer loans. On the other hand, you’ll take longer to pay off your car when you roll it into your mortgage.

Usually car loans are set for a period of three to five years. This means car repayments can be relatively high but at least you pay off the debt within a short period of time and won’t pay that much in interest. When you refinance and include the loan in your mortgage, you’ll be paying down that same auto loan for the next 15 to 30 years, or however many years are remaining on your loan. You won’t notice the increase in your monthly mortgage repayments that much as the car loan will be spread out over a longer period of time, but you’ll pay a lot more in interest overall.

What About Refinancing Fees?

Your current and new lender will both have a series of fees you’ll have to pay to refinance. For most refinanced mortgages, it will cost well over $1,000 to make the switch. Refinancing just to buy a car, depending on how much your vehicle financing will be for and how much you’ll save with a cheaper mortgage rate, may not be worth it. If you are refinancing to get a lower mortgage rate, combine your car loan, as well as a long list of other potential benefits, the costs are usually worth it. Working with a mortgage broker can help you make better decisions about how you can get the most out of your new loan, depending on your unique financial circumstances.

Is Refinancing Better than a Secured Car Loan?

With a secured car loan, the vehicle is the security. This option is generally cheaper in the long run because you’ll pay less in interest with a much shorter term. You’ll also have higher monthly repayments than you would if you refinance.

Will You End Up with More Debt?

That’s the risky part. When you refinance your home loan to buy a car, in a sense your mortgage swallows up the car loan amount. You may feel like you are only paying down a mortgage, when in fact you are paying off a home loan and a car loan. This perception of ‘less debt’ because you have fewer accounts, may lead to you taking on more debt, putting other purchases on a credit card or even taking out a personal loan.

Make sure you know yourself and your spending habits. Refinancing can make it much easier to pay for other big purchases, like a car, home renovation, or family vacation, or to consolidate other debts. You get a lower rate and one, simplified, manageable payment.

As long as you can be responsible and not take on extra debt because you feel like you aren’t juggling multiple credit accounts, a refinanced mortgage has its pluses. Just make sure you are aware of the drawbacks, such as fees and paying more in interest over the long-term.

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