Car finance mortgage warning

Car buyers who paid for their new cars by re-mortgaging their house rather than taking out a separate loan are throwing money away on unnecessary interest charges.

Parkers is warning that at a time when households are looking for extra cash to pay for increased utility bills, fuel and food costs, car buyers who increased their mortgage to pay for the car could be left with a car that’s plummeted in value, while loan repayments have increased.

A buyer who financed a £14,000 car by taking out a new mortgage at 7.2 per cent could be looking at a total bill of nearly £30,000 by the end of the agreement (see examples), while the same car would have been under £16,000 if it was bought with a standard car loan of 7.7 per cent APR.

Extra interest 

Although many owners would have accepted the higher overall repayments that come with a 25-year loan in return for lower monthly payments and a continuing increase in their home’s value, others may not have been prepared for the extra interest that comes from opting to pay through a mortgage.

If interest rates were to climb higher and house prices fall further, some car buyers will find that they’re paying more than expected.

Our advice is to seek financial advice as soon as possible. It may be that your mortgage allows you to make overpayments. If it does – and you can afford it – you should aim to get the amount you borrowed to pay for the car paid off as soon as possible.

That way you will no longer be paying interest on a car that almost certainly would have dropped in value.

Anyone currently looking to re-mortgage to finance a car should seriously think about the possible consequences – if a bank or building society will offer the money in the first place.

There are still plenty of lenders willing to offer more conventional car loans.

Depreciation 

Unlike your house, a car does not appreciate over the long term. By the time their mortgage comes to an end, some owners will find that they are still paying for a car that was scrapped many years ago.

In extreme cases, home owners who financed their lifestyle, including new cars, with the equity of their home, could find themselves with a serious repayment headache that selling their existing car won’t solve – thanks to depreciation.

It’s an incredibly expensive and inefficient way of borrowing money.

 

Example with mortgage  Average car price: £14,000 APR: 7.2 over 300 months (25 years) Monthly payment: £98.70 Total repayment: £29,611.85

Example with car loan (1) Average car price: £14,000 APR: 7.7 (Alliance and Leicester) over 36 months (3 years) Monthly payment: £436.77 Total repayment: £15,723.87

Example with car loan (2) Average car price: £14,000 APR: 7.7 (Alliance and Leicester) over 60 months (5 years) Monthly payment: £281.86 Total repayment: £16,911.82

 

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