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Household mortgage stress, defined when a household allocates over 30% to mortgage repayments, has been a hot topic of discussion over the last few years given rising interest rates.
Whilst it’s estimate that a little over 30% of Australian households were suffering from mortgage stress based on a Roy Morgan poll carried out in May of this year, spare a thought for our New Zealand neighbours.
New data from the Finance and Mortgage Advisers Association of New Zealand (FAMNZ) revealed that nearly 60% of New Zealand mortgage holders may be experiencing mortgage stress. Additionally, almost a quarter of borrowers allocate over half of their income to mortgage payments, highlighting a severe financial strain.
Let’s hope that those figures start to drop soon on both sides of the ditch.
In this week’s newsletter, we discuss some of the pitfalls of financing a car through a dealership, and contrast that with the pros and cons of leveraging equity in your home to fund the purchase.
Opting for a dealership’s finance team for a new car might seem straightforward, but it often comes with unexpected complications. Misleading interest rates, high documentation fees, and hidden costs can significantly increase the overall expense.
Three key factors to be wary of.
Interest Rates
Car dealers know that the first question buyers often ask is “What’s the interest rate?” However, the rate quoted typically excludes documentation fees and hidden charges, which are added to the total loan amount. This means the rate you’re told rarely reflects the true cost of your monthly repayments.
Excessive Documentation Fees
While brokers usually charge documentation fees between $400 and $600, car dealerships can charge anywhere from $900 to as much as $2,000. These fees are incorporated into the loan but are excluded from the dealer’s quoted interest rates.
Hidden or Additional Costs
Dealer financing often includes extra charges, such as monthly or weekly account-keeping fees, which are not disclosed in the quoted interest rate. These can further inflate the overall cost of the loan without the buyer realising it.
Using home equity.
Using home equity to buy a car via a mortgage is a viable alternative getting finance via a dealership or car finance broker, but its important to understand the pros and cons of this strategy when weighing up the two options.
Pros of using home equity.
Lower Interest Rates –
Mortgages typically offer lower interest rates compared to dealership financing, making it a more cost-effective option over time.
Longer Repayment Periods –
Spreading payments over a longer term reduces monthly financial strain, which can be helpful for managing cash flow.
Avoid Dealer Pitfalls –
By avoiding dealership finance, you sidestep hidden costs, inflated documentation fees, and misleading interest rates.
Simplified Financing –
Using mortgage funds eliminates the need to negotiate multiple loans and deal with dealership-specific terms and conditions.
Cons of using home equity.
Increased Long-Term Cost –
While monthly payments are lower, extending repayment over a mortgage’s lifespan can result in paying more in total interest for a rapidly depreciating asset like a car.
Risking Home Equity –
Borrowing against your home reduces equity and increases the risk of losing your home if repayments falter.
Extended Debt Timeline –
Cars have a shorter lifespan than mortgage terms. You may still be paying for a car long after it’s no longer functional or valuable.
If you have clients considering how to finance a car purchase, have them contact us and we can work through the best strategy with them.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
