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!