Using your home loan to buy a car

2012-03-24 08:25

Sbu writes:
I have a bond of R75 000 which will be paid off in seven years. I want to draw down R90 000 from my home loan to buy a car.

My current repayment on my home loan is R1 050 but I can afford to pay R2 200 a month.

“Is this a good idea and how long will it take me to pay off the increased bond?”

Maya replies:

It is generally a good idea to use your home loan to finance a car because the rate you pay on your home loan is lower than the bank would charge for car finance. The key however is to pay your car off within five years and not to extend the payments in line with your home loan.

•If you pay your R90 000 car off over 15 years, although your monthly repayment would be R906, it will cost you R163 000 in total because of interest – assuming an interest rate of 9%.

•If you pay the car off over seven years your repayment is R1 400 a month and the total cost is R120 700.

•If you want to pay it off over five years you would have to pay R1 800 a month but the total cost would be R111 000. That shows you the benefit of paying off your debts quickly!

Another factor to consider is whether you are able to draw down from your existing home loan. Marius Marais, CEO of FNB Housing Finance says if the total amount of the new loan (the existing home loan of R75 000 and R90 000 for the car) exceeds the amount of your original home loan then it may not be worth doing as you will incur additional legal and registration costs on a second bond that would need to be registered over the property.

Marais says, using the information supplied, “it appears that your interest rate is 5%, which is generally below the market average.

If we were to assume that you would retain this interest rate when extending your loan to R165 000 in order to include the car, such as the monthly payment is around R2 200, we would only need to extend the loan term by six months, that is to seven-and-a-half years.

“This is possible because of the low interest rate and the additional amount that you’re willing to put towards the repayment”.

If you are buying a new car, Marais says also keep in mind that certain car manufacturers offer great deals due to the interest rates on their products. It may be worthwhile to get a quote from the dealer, as well as the bank, and go with the one that offers you the lower interest rate.

Other banking products like personal loans are also worth checking for comparison purposes. Always look at the interest rate and length of loan as well as total amount paid over the period and don’t be tricked by a low repayment amount. As already demonstrated, a lower repayment amount will cost you more over time.

 

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