Low interest rates on home loans make it attractive to switch from a car loan to a mortgage, but if you’re not careful, you could end up paying more than double the original cost.
TURNING a car loan into a mortgage is one way to pay it off at a lower interest rate, but research has shown that it can actually be more expensive.
A new study from RateCity has found that while an average mortgage interest rate of 4.3% is much cheaper than an average car loan rate of 8.31%, the repayment term much longer than a mortgage loan could mean that 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 on the mortgage.
RateCity used a $ 30,000 car purchase to analyze three scenarios.
The first is that the buyer takes out a car loan and repays it over five years at an interest rate of 8.31%. The total interest paid would be $ 6,769.
The second is that the money is taken from a $ 350,000 home loan with a term of 25 years. The buyer then pays the additional $ 30,000 over five years, in addition to 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, the third option shows what happens if additional refunds are not made. The buyer withdraws the money from the same mortgage and simply continues to repay the loan normally. The extra $ 30,000 for the car turns into $ 77,710 over the 25-year term. That’s a total interest paid of $ 47,710.
RateCity Money editor-in-chief Sally Tindall said people are often dipping into their mortgages due to falling interest rates, ignoring the long-term effects.
“If you are withdrawing money from your clearing account or your withdrawal facility, be sure to return the money 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 had taken out a car loan.
“Compound interest can leave a nasty sting in the tail if you take money out of your mortgage and never manage to top it up. “
Mortgage Choice spokeswoman Jessica Darnbrough said home loans have always been popular for those looking to consolidate other debt, but although many have good intentions, they can fall into a cycle of debt. negative.
“They may think it will free up their cash flow now and even though they can’t afford to make additional repayments now, they will do it later when they earn more or have fewer bills,” said Ms Darnbrough. “But tomorrow is not coming and they continue to make minimal repayments.
“It’s a good approach if you can commit to paying later, but if not, this form of debt consolidation might not be right for you. “
Education professional Jennifer Sargeant has always bought cars, believing they are luxury, not good debt.
“If a car doesn’t make me money, I don’t want to pay it off,” said the mother of two, comparing car debt to credit cards. “If you don’t pay on time, you are living beyond 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 have to be able to enjoy what you have,” she said. “Whatever you spend the money, enjoy it, but know that you have to pay it back. You don’t want to be a debt slave.