When it comes to vehicle finance, there are numerous options available. You may be considering whether it’s worth refinancing your car loan using your home loan, however, it’s important to understand what that entails to ensure you make an informed decision.
Paying off your car loan with home loan refinance
Refinancing your home loan may be an easier and more affordable option when buying a new vehicle. It can simplify repayments to have a car loan and home loan combined, rather than making payments on two separate loans. This can make it easier to keep track of your expenses as you will have the convenience of one repayment each month. However, if you’re refinancing your car loan with your home loan, you need to be disciplined with maintaining your payments.
A key reason many people may consider refinancing a home loan to pay off a car loan is the potential to get a better interest rate. Interest rates on home loans can be lower than for car loans, so by paying off your car loan with your home loan, you may be able to get a lower interest rate.
If using your home loan to refinance your car loan, avoid paying the minimum. You want to ensure you can pay as much upfront as possible, which will shorten your loan term. The longer your loan term, the more interest you end up paying overall, so even if you get a lower interest rate by refinancing your home loan, you can end up paying more over the long term. This can defeat the purpose of using your home loan. If you can only pay the minimum, it may not be the best decision.
Before considering this option, it’s a good idea to review your home loan to see how much is remaining on your home loan, as the term of a home loan is a lot longer than for a car loan. You can use a car loan calculator to work out how much is left to pay on your loan and determine what your payments may look like with interest.
When financing a new vehicle some of the factors to consider are whether you upgrade vehicles regularly, any other financial commitments or loans you need to pay off, and if you will have financial stability over the lifetime of your loan, as you want to ensure that even if your situation changes you’re still able to keep up with payments. If you primarily use your car for work purposes, there may be other options to consider such as a novated lease.
Make sure you thoroughly consider whether refinancing your home loan to pay off your car loan is the best option for you. Do your research and calculate the numbers to work out if it fits within your budget, and consider the potential long-term effects of choosing this option.
Potential downsides
In some situations, combining a car loan into your home loan can provide financial benefits, but there may be some potential risks.
Your home’s equity is something to consider before refinancing your home loan to pay for your car loan. Refinancing your home loan to take on additional loans will lower your equity.
If your equity drops below a certain threshold, you may have to pay additional charges for Lenders Mortgage Insurance (LMI).
When refinancing your home loan, lenders charge you fees to do so. The cost will depend on your credit score, mortgage lender, and the amount on your home loan. You may also be required to pay for a home appraisal.
As home loan rates are generally lower than those for car loans, it can seem like you’ll be paying less. However, if you combine two loans, you will be paying interest on your car for the remainder of your home loan period. A home loan term is significantly longer than a car loan term, so you will likely end up paying a lot more in the long term. You may get a cheaper rate upfront, but end up paying more overall.
If you’re wanting a better interest rate on your current car loan, you may want to consider refinancing the car loan, without rolling it into your mortgage.
Speak to a finance specialist
If you’re unsure whether paying off your car loan with a home loan refinance is the best option for you, you should speak with a finance specialist to get expert advice.
Refinancing your home to pay for your car can be complicated. It often involves additional fees and charges, as well as interest paid overall. It’s important to understand what you’re getting into, and seeking professional advice can help you determine if it’s the best option for you.
Contact the team at 360 Finance to find out more about your vehicle finance options.
