Mortgage
If you own a property and have built up some equity, you might be able to fund your car purchase by redrawing on your mortgage.
This can seem like a very low-cost way to get your motor finance. Mortgage interest rates are generally lower than the rates you’ll get on either personal loans or car loans, and the monthly repayments are usually much lower too, as the loan will be spread out over a much longer period (up to 25 or even 30 years).
It can also seem like an easy solution if you already have a relationship with a bank. As long as nothing has changed, they’ll already have the information they need about your finances so the application process can be quite straightforward (although banks rarely move quickly so it could still take some days to organise).
But although this can make your loan more affordable in the short term, the reality is that you’ll almost certainly end up paying much more for it in total.
Since the loan balance (the original amount you borrow) will be paid off much more slowly, you’ll be paying interest on it (and possibly interest on the interest) again and again over years or even decades. And interest rates on mortgages are rarely fixed for more than five years, so you could end up paying a much, much higher rate in the future if rates rise over time.
Get the best deal on car finance
Find your ratesMortgage Pros and Cons
Pros:
- Affordability is the most obvious advantage. You can expect to pay a lower interest rate and make lower monthly repayments by adding your car finance to your mortgage – which can be very appealing if you don’t have a lot of spare cash.
- Simplicity is another advantage – you’re already making a mortgage payment each month, so you’ll simply increase the amount of that rather than having to juggle multiple payments to different lenders.
- Since you’re not using your car as security, you’ll have the same flexibility as with a personal loan to sell it whenever you want.
Cons:
- Cost! Affordability can be a trap because making lower payments over a longer period means you’re paying far more in interest over the long term – especially if interest rates go up down the track. And do you really want to still be paying for this car 20 years from now?
- Mortgages often come with pretty restrictive terms and conditions. You may not have the flexibility to make early repayments (at least, not without paying a hefty fee), even if you sell your car and want to pay back the lump sum.
- The biggest disadvantage is that by adding your motor finance to your mortgage, you’re using your property as collateral. If you don’t keep up the repayments, you could lose your home – an even bigger deal than losing your car!
Other car finance options
1. Car Loan
Perhaps the most obvious motor finance option is a car or vehicle loan. The key feature of this kind of finance is that it is a secured loan, where you use your new car, motorbike, or other vehicle as collateral.
2. Personal Loan
If you don’t want to use your new car as security for your loan – or if you’re buying a second-hand car that’s more than six years old, you could opt for a personal loan instead to finance your new motor.
3. Hire Purchase
Hire purchase is very different from a car loan or personal loan. With this type of motor finance, YOU are not actually buying the car, and you won’t own it until the end of the contract.
4. Lease Finance
It’s basically a rental agreement – like with hire purchase, the finance company will buy the car for you and then lease it to you in exchange for regular payments over an agreed period.
