Should you use the equity you have built in your home when you want to buy a car, or upgrade furniture, even renovate, or is a personal loan a much better option?
Certainly, if you have a redraw capacity on your loan that is enough to do what you need (i.e. either buy a car, refurnish or renovate) that is a far easier option than filling in loads of forms to update your financial position to the lender, or even look for a new lender and compare prices.
In many redraw situations you don’t even need to speak to a person at all, your internet banking system may allow the transaction to go ahead and will even advise you if an adjustment of instalment is required.
Home Loan interest rates are usually half the price or more of Personal Loan rates, so it can be a far cheaper option, consider the 3 to 5% versus 9 to 11% of Personal Loans.
There are also minimal or no fees for redraw with most lenders, but if instead you need to fully rewrite your home loan or take out a personal loan, that can be a very different picture, and those Lender forms need to be completed.
So, it seems that using redraw can be a cheaper and convenient way to get what you need, but what do you also need to consider when going down this path?
- By adding a car cost or any other cost to your existing home loan, be it by redraw or full rewrite, you can extend that part of the loan far longer than it would have been if written by personal loan which is usually between 5 and 7 years. Now that might appear to be great, as your home loan instalment has not changed or will not change much, but do you really want to pay your car out over 30 years? You will be paying far more interest off that way. Your mortgage broker can help with a strategy to combat this.
- Some people find it easier to have those debts separate so they really know what they owe and don’t need to guess if the car has been paid off yet or not. Your mortgage broker has access to several person loan options and you need to find the most suited deal for you.
- If not using redraw and considering a rewrite of your home loan, you might not have the equity in your home that you think. Usually the lender will consider revaluing your property and if values have gone down, you may not have as much to draw against? But, not all lenders are the same and not all valuers, again your mortgage broker has many different lenders and non-lenders to choose from, best seek their advice.
There are many ways to approach this situation and your mortgage broker can help with all the options available to you. This can be a great way to build your asset value, but advice is the key.