Can You Refinance Home Loan to Buy a Car?

Refinancing a home loan is typically associated with reducing interest rates, consolidating debt, or accessing equity to fund home improvements, but it can also be used to make other major purchases, such as buying a car. However, before choosing this route, it's important to understand in what situations it’s possible, and whether it is advisable to refinance your home loan for a car. In this article we cover these topics, as well as the benefits, risks, and alternatives to refinancing your home loan to buy a car.

Is It Possible to Refinance Your Home Loan to Buy a Car?

Yes, it is possible to refinance your home loan to buy a car, particularly through a process known as cash-out refinancing. This option allows you to access the equity you have built up in your home and use the extra funds for significant purchases, such as buying a vehicle. When you refinance your mortgage with a cash-out option, you borrow more than your existing loan balance and pocket the difference, which can be used to finance your car. To be eligible, lenders generally require that you have at least 20% equity in your home. In other words, your outstanding mortgage should not exceed 80% of the current market value of your property. The greater your equity, the more you can borrow.

However, it’s important to remember that lenders will carefully assess your financial history and current situation before approving such a refinancing request. They will look at your income, credit score, debt levels, and the current value of your home to determine if you can manage the increased loan amount. While the interest rate on your home loan is likely to be lower than that of a standard car loan, you’re also taking on additional debt and tying it to your property. This means that, while it may make your car purchase more affordable in the short term, you must be confident that your financial situation can handle the long-term implications of a larger mortgage.

Should I Refinance My Home Loan to Buy a Car?

Refinancing your home loan to buy a car can be beneficial, and you can consider the benefits below, to see how they apply to your situation.

Lower Interest Rate and Smaller Repayments: Refinancing your home loan to buy a car typically allows you to take advantage of the lower interest rates associated with home loans compared to car loans. As a result, while your home loan repayments might increase, the overall cost is likely to be lower than financing a car through a traditional car loan, especially given the longer repayment period.

Single Set of Fees and Repayments: Refinancing your home loan to cover the car purchase can reduce fees since you won’t need to manage separate car loan and home loan accounts. Additionally, consolidating the repayments into one loan streamlines your finances, making it easier to manage your debt and avoid juggling multiple due dates.

Additional Benefits of Refinancing: Refinancing can come with extra benefits, such as securing a better interest rate or more favourable terms on your home loan. If it's been a while since you've compared rates, refinancing might provide an opportunity to lower your interest rate at the same time as accessing funds for a car.

Tax Benefits: For property investors, interest on investment loans may be tax-deductible, which could extend to the increased portion of the loan used to buy a car. However, this scenario can be complicated, and you should seek advice from a financial expert.

How Does Refinancing to Buy a Car Affect My Mortgage Repayments?

Refinancing your home loan to buy a car will affect your mortgage repayments by increasing the overall size of your loan. Since you are borrowing more than your existing mortgage balance through a cash-out refinance, your new monthly repayments will increase to cover the additional loan amount. However, because home loans typically have lower interest rates compared to personal loans or car loans, the repayments on the car portion may still be lower than they would be through a dedicated car loan. While this may seem like an affordable solution in the short term, it’s important to remember that you are essentially extending the repayment of the car over the life of your mortgage, which could last decades.

This extended repayment term means that while your monthly payments may be smaller compared to a traditional car loan, the total interest you’ll pay over time could be significantly higher. For example, a car loan typically lasts for five to seven years, while a home loan spans up to 30 years. Spreading out the car cost over a longer term means you could be paying for the vehicle long after its value has depreciated, and you may end up paying much more in interest in the long run. It’s crucial to calculate the overall cost and determine whether paying off your car over a shorter period through a car loan or personal loan might be more financially advantageous.

Speak to a Mortgage Broker for Free

If you need assistance or have some questions about refinancing your home to buy a car, fill out the form below and an expert will call you back.

What Are the Downsides of Refinancing for a Car?

Paying Off the Value of a Car for Longer: The primary downside is that you're stretching the repayment for a depreciating asset (a car) over a much longer period. This could mean paying off the car for decades, leading to higher overall interest costs, even with a lower interest rate.

Multiple Cars Over the Loan Life Could Harm Equity: If you repeatedly dip into your home loan for car purchases, you might erode your home equity. This could limit your future borrowing power for purchasing investment properties or for renovations.

Risk of Negative Equity: Cars typically depreciate quickly, while home values generally appreciate. However, if the value of your home decreases, you might face negative equity, meaning you owe more than the value of your assets. This situation can leave you financially vulnerable, especially if your circumstances change, such as losing your job, or stopping work due to having a baby. You risk defaulting on your mortgage, which could result in foreclosure.

Cost of Refinancing: Refinancing isn’t free and involves additional costs like valuation fees, exit fees, and lender's mortgage insurance (if applicable). These fees can offset the savings you might gain from using the equity to purchase a car, so it’s important to carefully calculate the total cost before proceeding.

Alternatives to Refinancing Home Loan to Buy a Car

If refinancing your home loan for a car purchase seems too risky, consider other financing options:

• Car Loans: These are designed specifically for car purchases and often have competitive rates. Additionally, car loans typically have shorter repayment periods, meaning you’re less likely to be paying off the car after it has lost most of its value.
• Personal Loans: These can be a flexible option if you don’t want to tie the loan to your home. While personal loans usually carry higher interest rates, the shorter loan term can help you pay off the car quicker.
• Dealer Financing or Leasing: Many dealerships offer financing or leasing options, which can be convenient and sometimes come with promotional rates. However, it’s important to compare these with external financing to ensure you're getting the best deal.

How to Start the Refinancing Process

If you decide to that refinancing your home loan to buy a car is the right option for you, the first step is to evaluate your home equity and current financial situation. It's highly advisable to consult an experienced refinancing mortgage broker, who can help assess your situation, calculate your borrowing power, monthly repayments, and refinancing costs. Eden Emerald Mortgages is 100% free of charge, and give you access to the best interest rates, as they negotiate with over 40+ lenders. Even if you just have some questions, leave a message below and they will get back to you quickly.

Conclusion

While refinancing your home loan to buy a car is possible, it’s important to weigh the benefits and risks carefully. Refinancing could lower your interest rate and simplify repayments, but it also extends your loan term and increases overall debt. Consider alternatives like car loans or personal loans to determine the best option for your financial situation. Always consult with a mortgage broker before making a final decision to refinance.