ROLLING a car loan into a mortgage is one way to pay it off at a lower interest rate, but one study has shown it can actually be more expensive.
New RateCity research revealed that while an average home loan interest rate of 4.3 per cent is far cheaper than the 8.31 per cent average rate of a car loan, the much longer repayment term of a mortgage could mean the owner of a $30,000 car would end up paying $77,000 for it in total. Money could only be saved by diligently paying extra into the mortgage.
RateCity used a $30,000 car purchase to analyse three scenarios.
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The first is that the buyer takes out a car loan and repays it over five years at an interest rate of 8.31 per cent. The total interest paid would be $6,769.
The second is that the money is redrawn from a home loan of $350,000 with a 25-year term. The buyer then pays the extra $30,000 over five years, on top of their regular home loan repayments. The total interest paid on this option is $3,393 and shows that this is indeed a cheaper way to pay off a car.
However, option three shows what happens if extra repayments are not made. The buyer redraws the money from the same home loan and simply continues to pay off the loan as normal. The extra $30,000 for the car turns into $77,710 over the 25 year term. That is total interest paid of $47,710.
RateCity money editor Sally Tindall said people often dipped into their mortgages due to lower interest rates, without considering the long term effects.
“If you take money out of your offset account or redraw facility, make sure you put the money back as soon as possible,” Ms Tindall said. “The best way to do this is to set up an automatic payment, similar to what you would have paid if you’d taken out a car loan.
“Compounding interest can leave a nasty sting in the tail if you take money out of your mortgage and never get around to topping it back up.”
Mortgage Choice spokeswoman Jessica Darnbrough said home loans have always been popular for those looking to consolidate other debts, but while many have good intentions, they can fall into a negative debt cycle.
“They may think it will free up their cash flow now and while they can’t afford to make extra repayments now, they will do so down the track when they are earning more, or have fewer bills,” Ms Darnbrough said. “But then tomorrow doesn’t come and they keep making minimal repayments.
“The approach is fine if you can commit to paying more later, but if not, that form of debt consolidation may not be for you.”
Education professional Jennifer Sargeant has always bought cars outright, believing they are a luxury and not a good debt.
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“If a car’s not going to be making me money, I don’t want to be paying it off,” the mother of two said, likening car debt to credit cards. “If you’re not going to pay it off in time, you’re living above your means.”
Ms Sargeant said she would consider adding a car loan to her mortgage, but would work hard to pay it off as soon as possible.
“If you work hard you need to be able to enjoy what you’ve got,” she said. “Whatever you spend money on, enjoy it, but know you’ve got to pay it back. You don’t want to be a slave to debt.”
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