Home loans are usually the cheapest form of financing and it may seem like common sense to use this lower interest rate to pay for shorter-term debt like car finance.
In theory you save money by paying a lower interest rate, however, most people forget that a car is generally financed over five years, whereas a home loan is generally financed over 20 years.
If you end up paying off your car over the period of your home loan, you will pay significantly more.
Lets look at an example: Let’s suppose you want to buy a car for R300 000.
You get car financing at 12.75% over 5 years with a monthly re-payment of about R6 820, which would cost you R409 200 over five years. That means you pay over R109 000 in fees and interest.
Instead you decide to use your home loan which has 15 years left to repay.
You have an access facility that allows you to take out the equity that you have built up.
Rather than paying 12.75% interest on your car financing, you draw the money out of your home loan and you only pay 9.75% interest.
Your bond instalment would increase by R3 180 per month. This seems so much cheaper than paying the R6 820 per month on the car finance. But what is the financing really costing you?
By the end of the 15 years you would have paid R572 000 for that car, of which R272 000 is interest ‒ more than double the interest paid on the car financing option.
The only way to really save from the lower interest rate is to increase your mortgage repayment by the same amount that you would have paid each month for the car finance. In this example, if you increased your mortgage payment by R6 820, you will pay off the car in 55 months with a total cost of R375 100. That is R34 000 less than the car finance would have cost you.
The same calculation applies to any debt you consolidate into your home loan. Only use your home loan if you have the discipline to pay off the debt over a short period of time.