Should you use your home loan to buy a car?
If you own property you are able to use it as security for any lending purpose, says Nondumiso Ncapai, head of home loans at Absa Group. But should you use this privilege to purchase a car?
How would you finance your car with your home loan?
Ncapai says Absa Home Loans offers a home owner access to additional equity through these three facilities:
- FlexiReserve: These are funds pre-paid by you into your home loan. These are immediately available for withdrawal.
- ReAdvance: This account allows you to access funds previously paid into your home loan account, taking the outstanding balance back to the original loan amount granted.
- Further Advance: This is accessing the additional equity available on the property by applying for and registering an additional bond (a second bond) on the property.
According to Ncapai, the ReAdvance and Further Advance applications are subject to a credit assessment. If the application for this is successful, the funds will be paid into your account.
Some banks, such as Absa Home Loans, do not pay the funds to a third party – the bank only pays you, so that you can pay for your car yourself.
But is it a good idea?
According to Ncapai, the home loan terms are considerably longer than the maximum vehicle finance term (20 years vs 72 months).
“While the repayment amount under the home loan may be less than the repayment amount under the vehicle finance agreement (due to the differences in loan term), financing under the home loan is not cost effective due to interest accruing over a longer term,” she warns.
Ncapai adds that if you purchase a vehicle on your home loan and choose to pay this additional debt over a period, you will pay more interest on the vehicle than if you had purchased it through a vehicle finance provider.
She says that if you do not finance your new car with a vehicle finance provider, you lose the storage of the eNaTIS documents for your car, and additional assistance and protection under the National Credit Act (NCA) when something goes wrong with your car or car deal.
What can you do?
Some banks offer customers the ability to structure facilities into a secondary account on their home loan, and select a repayment term which can be less than 20 years.
“If the customer repays the same amount of money, as quoted by the vehicle finance provider, into this secondary account or their home loan, they will benefit from paying reduced interest,” says Ncapai.
To benefit from this, Ncapai says that you must be disciplined in your monthly repayments.
However, should you choose to only pay the minimum repayment amount relevant to the home loan, you will end up paying more interest for the car, which is a depreciating asset, she adds.
She also advises that you purchase a motor vehicle insurance because homeowners insurance does not cover your car.
Discuss the financial benefits of funding the purchase of your vehicle with your financial broker, or your bank before making a final decision.
This article has been prepared for information purposes only and it does not constitute legal, financial, or medical advice. The publication, journalist, and companies or individuals providing commentary cannot be held liable in any way. Readers are advised to seek legal, financial, or medical advice where appropriate.