Why you shouldn’t pay for your new car with your mortgage

Why you shouldn’t pay for your new car with your mortgage

It’s easy to think that paying for your new car with a mortgage top up is cheaper than other car finance options. Especially at the moment, with home loan interest rates the lowest we’ve seen in years. But there are a few things to consider before you make that phone call to your bank manager.

Repayments made over a mortgage term for the extra amount you borrow to pay for your car, add up to a higher cost of borrowing in the long run. You may even find yourself paying  for your car long after it’s sold, too.

Let’s get back to those home loan interest rates though. In NZ they are lower than car loan rates, but the amount borrowed to buy a house is usually more than the amount borrowed to buy a typical car. The term is longer; a maximum of 30 years on houses versus 5 years on cars. You need to take into account the effect of compound interest over the term of the home loan (up to 30 years) as opposed to the longest car loan term of 5 years. This increases the amount of interest payable on your home loan even though the interest rate may be lower.

Home loan vs car loan, the difference explained:

The mortgage calculator on Interest.co.nz’s website is a great comparison tool. A $350,000 mortgage paid over a 30-year term at 4.99% per annum, if making the minimum repayments over the next 30 years, will cost a total of $325,720 in interest.

If your new car costs $30,000 and this is added to the mortgage above, the total amount of interest over the 30-year term now totals $353,680. The extra interest is $27,880 – almost another new car!

Now let’s look at a car loan that is taken out independently of the mortgage. How much interest would be repaid on the same car? As a homeowner with clean credit, you could qualify for an interest rate as low as 9.95% through The Finance Lady for your personal secured car loan. Making the minimum repayments over 5 years, you will pay a total of $8,220 in interest. Ultimately, you will have saved about $19,660 interest on your new car.

How to save money when taking out your new car loan:

Choose a secured loan.

Choosing a secured car loan rather than a personal unsecured loan will ensure you get the lowest possible interest rate for your vehicle.


Make additional repayments.

Making additional repayments when you’re able will pay the loan off sooner. And reduce the total amount of interest payable over the term of the loan. This idea makes much more of a difference to the amount of interest you pay. Compared to the difference in the actual interest rate of your loan.


Compare all the lenders.

There are many lenders in the market catering to new car buyers with all different circumstances.



Bonus Tip – while choosing the right lender is important, you need to be very careful making multiple applications for finance because each lender may carry out a credit check, leaving a traceable enquiry on your credit file. This will ultimately affect your efforts to secure a good interest rate. To find out more about this CLICK HERE

How can you avoid this? The Finance Lady, through our association with Credit One has access to a panel of over 18 leading lenders. We compare all of them for you, then secure an approval that best suits your individual circumstances. To talk to the team please contact us directly.