Buying a car using your home loan

So you have a little equity in your home loan and are planning on buying a car. Do you finance the car under a normal hire purchase agreement or do you use the equity in your home loan to purchase the car? Would buying a car using your home loan be a good or bad idea?

It may surprise you if I said good idea but that is exactly what I am going to say. If you are going to finance a car rather finance it using the equity in you home loan and you could save yourself thousands.


There are of course rules to taking this path. Without discipline you will pay a lot more than expected so follow the rules carefully and you can take advantage of this little known fact.

The vehicle purchase side:

• Shop around for the vehicle you want.
• Once you have chosen the vehicle pay a visit to the garage where you are planning on purchasing it. Ask them for a quotation on the monthly instalment you will be paying when you finance the vehicle through a vehicle finance option. Make sure you could afford that payment as if you were purchasing it on hire purchase.
• Sleep on it, discuss it with your spouse, partner or best friend, recheck your finances and the affordability of the vehicle. (Don’t forget you need to insure it) Make sure you are comfortable with your decision to purchase the vehicle.
• Revisit the garage. This time negotiate a cash discount for the vehicle with the garage (most garages will give you a discount if you pay cash)
• Withdraw the amount payable for the vehicle from your home loan. Electronic transfer to your personal cheque account is normally the easiest way.
• Pay for the vehicle in cash. (Not hard cash – a transfer or cheque will be fine, ask the garage how they would want the payment made)

The home loan side:

• In order to ensure you are disciplined, set this up at the same time as paying for your vehicle.
• Arrange for your home loan to be paid at a fixed payment per month. The fixed amount should be your regular home loan repayment plus the quoted monthly instalment you would have paid on your vehicle.
• This should be paid set up for the same number of months you would have paid the hire purchase agreement. To revert back to a flexible payment thereafter.

Example:

You purchase a vehicle for R 80000.00. Your monthly instalment, calculated at 14%, is R 1953.72 per month for 56 months. You then pay for the vehicle in cash by withdrawing R 72000.00 from your home loan (you negotiated a 10% discount for cash). You then pay an instalment of R 1953.72 per month extra into your home loan for 56 months.

Why do you save thousands?


I will use an example to explain.

Lets say you have an outstanding bond of R 400 000.00 with an instalment of R 4 265.72 at an interest rate of 11.5% . You keep paying your home loan as normal. You purchase the car on hire purchase like you normally would.


After 56 month:

The amount outstanding on the home loan would be: R 368 149.34
The amount paid for your vehicle would have been: R 109 408.32

You paid out a total amount of R 417 408.32
Interest paid amounts to: R 305 557.66
Capital paid is: R 111 850.66

You take the equity in the home loan of R 72 000.00 to buy the car. You now fix your instalment at R 6 219.44 for 56 months.

After 56 months:

The amount outstanding on your home loan would be: R 347 060.64
The amount paid for your vehicle would have been: R 72 000.00

You paid out a total amount of R 417 408.32
Interest amounts to: R 292 468.96
Capital Amounts to: R 124 939.36

Looking at this you can see that after only 56 months you have saved R 21088.70 in interest on your home loan without paying a cent more!

And the savings don’t stop there…you won’t have to pay interest on the saved amount for the remainder of the loan term. Just an added benefit!

How to stick to your budget:

So you completed the budget on the last post. Now you have to stick to it. This is the hardest part, every time you walk into the shop you are tempted to spend. How on earth are you planning on avoiding this?

A change of mindset is required. This tip may help:

Most bills should be automatically paid via a debit or stop order, eg mortgage bond, credit cards, insurance, cellphone bills and school fees. If you have not loaded these bills on a debit order system, phone the relevant companies and ask for this to be done. Not only does it ensure you bills are always paid on time but the cost of a debit order transaction is less than half of writing out a cheque or drawing cash.

Debit order paid accounts should be no problem as the money is deducted straight from your bank account as soon after payday as possible. Change the dates if you find you spend the money before it has been taken off your bank account as returned debit orders can be costly and reflect badly on your credit record.

The balance of the budget is where the biggest “cheat areas” are. So make up a set of envelopes mark each one with the name of the expense and the amount you have budgeted for as per the examples shown below.

Envelope 1:                     Envelope 2:                               Envelope 3:
Groceries                        Entertainment                           Gifts
R 5000.00                       R 2000.00                                  R 300.00

In the old days you could put the money in each envelope, but this is too risky in this day and age, not to mention it costs. The transaction fees for swiping your card are much lower than drawing cash.

So instead of carrying cash around carry the empty envelopes. Each time you spend money deduct that amount from the amount written on the envelope and when you reach R 0.00 you have no longer got funds available until payday in that specific area. Try keep your till slips in the envelope related to the spending, that way if you run out of money you can look through your till slips and decide which items you do not really need and next month you can eliminate them from your purchases. (More about this next time)

If you run out of money in an envelope.....
 
Do not “steal” from another envelope!


If you have spent your budget for that activity or area, it is spent and you will make it through the month until payday without any more purchases. Remember that if you carry the envelopes around with you and complete them as you spend you will know when you are reaching the end of your budgeted limit and slow down before you reach the dreaded R 0.00.

Each of your envelopes should look something like this at the end of the month. Hopefully you too have a positive balance.

Sample Envelope

At the end of the month if you have any money left in an envelope use that money to pay off you debts faster, starting with your credit cards. If all your other debts are paid off deposit the amount into your home loan, you will be surprised at the difference it makes both to your minimum monthly instalment or even better if you don’t decrease the minimum payment to the length of the loan.

Make sure your savings, both holiday and general are in a separate bank account which earns interest. That bank account should be a savings account and preferably not have a debit/transaction card. If it does, leave it at home, do not take it with you. A safe is the best place for it to eliminate temptation.

Budgeting

Most people I meet don’t budget, they tend to spend whatever they have and when the money is finished, it’s finished. They are the type of person who, if your debit order is a day late it won’t be honoured and halfway though the month they are not sure why they have no money left. They have little or no savings and tend to purchase goods on impulse.

Not sure if you are one of these people? Answer the following questions:

1. Do you draw up a budget every month?
2. Do you discuss this budget with your partner whilst drawing it up?
3. Do you compare your actual expenses to your budget at the end of the month?
4. Are budget expenses equal your actual expenses?
5. Do you plan your purchases before making them?

If you answered NO to the above questions, you should be taking a look at your financial situation and start budgeting.

Don’t know where to start?
Here’s a good beginning:
Copy this budget layout

Now complete it (with your spouse if possible):
A few tips to make it easier:

• Your salary should be your gross salary, the amount you earn before deductions.
• Other income should include all other sources of income – eg rental, royalties, annuities etc.
• Short term insurance is insurance for your assets. Eg, car, household.
• Other policies will include payments made on investment policies, unit trusts etc
• Store card payments need to be calculated by adding all your store card instalments together.
• Credit card payments must be calculated by adding the minimum payment due for each card together.
• Entertainment includes all things entertaining. eg Going to a restaurant, movies or the theatre, Buying new Playstation or Xbox games, any money you plan on spending on keeping yourself entertained for the month. Remember this is the place you should be looking at cutting expenses first.
• Clothing should be cash bought clothing – you should not be buying clothing on credit. If you are – keep the payment in the store card figure, but plan to buy clothes with cash from now on. You thus need an amount to spend on clothing – give each member in your household a limit or amount for your budget, if you have no idea how to work out how much you spend, take last months total purchases on your clothing store cards – this is a good place to start, also remember it is a good place to cut if you are short of money.
• Hairdresser and beautician cost should be added for the month – another first to go item.
• Gifts – only if you have a birthday this month – after doing this for a while you will start to save every month for gifts and thus need a little every month as opposed to a lot sometimes. Birthday party costs should also be added here.
• Bread and Milk is another tricky cost – try this way “I go to the corner shop 3 times per week and spend an average of R 100, this means R 300 per week and R 1200.00 per month.”
• Add all your income – place it in “Total income” Add all your expenses – place it in “Total expenses”
  Amount left = Income – Expenses

A budget should be a plan around which you live rather than a rough idea of what you will be spending. This simple philosophy change can change your life. Try it, I dare you!

Draw up a new budget every month. Compare last months budget to this months budget. I recommend keeping these records for 6 months to compare them. The budget will highlight your strengths and weaknesses when it comes to money management. You can then address specific areas and train yourself to improve your weaknesses.