Why adding your car finance to your home loan might not be the best idea?

Redrawing on your home loan to finance a car may seem like a pretty straightforward way to secure a low interest rate since home loan interest rates are currently much lower than the standard secured car finance interest rates, however there are a few reason why this can be a bad idea and end up costing you much more in the long run.

The interest rate on a home loan might be lower, however the total amount of debt on a mortgage is much larger and the effect of compound interest means that you could end up paying more interest by combining your car finance with your home loan.

Home loans versus car loans, a practical example

Let’s take a look at a quick example, using NAB’s base variable rate home loan based on the average $500,000 home loan, it is estimated that making the minimum repayments over the course of the loan, you will pay a total of $377,082 in interest over the life of the loan.

Now let’s say you’re looking at a new Mazda 6 for the family at $36,000 drive away. If we add that $36,000 to our loan, the interest payable jumps to $404,232 simply by adding the additional debt. That’s a whopping increase in interest of $27,150 – that’s nearly the price of the car just in additional interest.

If you are set on adding the cost of a vehicle to your home loan, it is vitally important to make sure you make the additional repayments you would have been contributing to your car finance to your home loan. This will help to minimise some of the interest payable. Only the most disciplined borrowers should consider this approach. Unless you pay lots of extra repayments, you could be doubling the cost of your car.

At M1 Finance, we specialise in tailoring bank-beating, low rate car finance packages for our customers. Whether you’re looking to purchase a brand new car, a second-hand car, through a dealership or from a private seller, our specialist Finance Consultants can compare products from over 35 of Australia’s most trusted financiers to find the best finance option to suit your needs.

Each of our specialist Finance Consultants have over 10 years’ experience and a wealth of knowledge in the finance industry, so give us a call today on 1800 538 287 for an obligation-free chat or get an instant online quote to see how much you could save on your car finance.