Can I refinance my home loan to buy a car?

What does it mean to refinance your home loan?

Refinancing your home loan essentially means switching home loans. You may refinance with your current home loan lender to switch to a different type of loan, a higher loan amount or both. Alternatively, some borrowers choose to refinance with a different lender, usually to get a better interest rate. Some lenders in Australia offer cash back or other perks to customers who refinance with them.

Aside from seeking a lower interest rate, there are a number of reasons you might choose to refinance your home loan, one of which could be to free up funds to make a big-ticket purchase like buying a car.

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Can I buy a car by refinancing my house?

It may be possible to buy a car by refinancing your home loan, depending on your circumstances. For example, if you are considering buying a car, but you feel like the interest rate on a car loan is too high, or if you would simply prefer for all of your loans to be consolidated in the one place so you only pay one set of fees and interest, then you could ask your lender about this. Alternatively, if you think you could get a better deal to fund your car by refinancing with a different lender, you could consider comparing your home loan options and speaking to a financial adviser or mortgage broker about your approach.

If you refinance your mortgage to buy a car, then typically, you would release some of the equity you already have in your home to fund the purchase of the car you want to buy, assuming you have sufficient equity to do this. The cost of the car would then be added to the balance of your home loan, and you would continue paying the loan off at the interest rate you and your lender have agreed on.

Should I refinance a mortgage for a car?

If you are thinking about refinancing your home loan to purchase a car, there are a number of possible pros and cons to consider. Some potential benefits of refinancing a home loan to buy a car can include flexibility in how you structure your new home loan (for example, whether you choose a home loan with more extras like offset accounts and redraw facilities), the potential to refinance to a lower interest rate, the potential to pay just one set of fees instead of multiple ones (if you had both a home loan and a car loan), and the convenience of having several debts consolidated in the one place.

There are also some potential drawbacks to be wary of, however. One of these is the potential to end up paying refinance costs. For example, if you wish to break out of a fixed home loan before your term is complete, then it is likely your lender will charge you a break fee. Similarly, some lenders can charge upfront refinance fees of several hundred dollars or more. Fees can vary though, so you will need to check with your individual lender about whether they charge them and how much they would be.

Another potential drawback is the fact that, even if you refinance your loan to a lower rate, you could end up paying more on your home loan in the long term than if you hadn’t refinanced. This is because you will be adding to the balance of your home loan, and potentially extending the repayment period.

This means the amount you end up paying in additional interest could potentially cancel out any savings you might make by refinancing. If you’re concerned about this, it may be worth considering a home loan with a variable rate, as variable-rate home loans typically come with the option of making additional repayments over and above what you owe each month. Some fixed-rate home loans allow you to do this as well, so check with your lender if you’re unsure. Either way, if you can afford to make additional repayments on your loan and your lender allows you to do so, this could help you to pay it off faster, thus reducing the amount of interest you have to pay over the long term.

It’s also worth keeping in mind that cars tend to depreciate in value starting as soon as you buy them, and also incur wear and tear as you drive them day to day, leading to potentially high maintenance costs the older the car gets. This means that if you choose to add a car to your home loan and you are paying off the debt over a long period of time, you may still be making repayments on your car long after it has outlived its usefulness or you have made the decision to replace it.

Can you use your house as collateral for a car loan?

Refinancing your home loan to purchase a car is not the same thing as using a home as collateral for a car loan, and doing the latter could be risky if you run into trouble repaying the balance of your car loan.

When you put something up for security or ‘collateral’ as part of a loan, then you give the lender the right to repossess and sell it should you be unable to make your repayments. Generally speaking, a car loan is secured against the vehicle itself, meaning that if you are unable to make your repayments, your lender will take possession of the car and sell it to recoup the costs. This is known as a secured car loan.

Likewise, a home loan in Australia is normally secured against the property being purchased, so if you already have a home loan it’s likely your lender is using your home as security for it. This could create significant problems if you try to use the same home as collateral for a car loan.

As your home is likely to be your biggest asset, you should thoroughly consider your options before putting your home up as collateral for a loan. It’s often recommended that you get professional financial advice before making such a decision.

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