If you roll a car loan into your home loan, you'll usually get a lower rate, but you can end up paying off the car over 30 years. The way around it is to put the car on its own split of the home loan and send every spare dollar there. You get the mortgage rate, and the car still gets paid off on something like a car's timeline.
What happened with one of my clients
A client came to me wanting $10,000 cash out of his mortgage for a holiday. Fair enough, that happens all the time. Then he thought a personal loan might be the better way to do it, which is also fine and sometimes the smarter move.
By the time we'd talked it through, he wanted his car loan gone as well, and the $10,000 had turned into $40,000. There were a few hiccups and the personal loan fell over. So we came back around to the mortgage, knowing we'd looked at every option he wanted.
We didn't just add the $40,000 to his home loan, though. We gave it its own split.
Can you put a car loan on your mortgage?
Usually, yes, if you've got enough equity in your home and you can show the lender you can afford the bigger loan. It's a form of debt consolidation: you refinance or top up the home loan and use the extra to pay out the car.
The upside is the rate. Home loan rates are generally lower than car or personal loan rates, because the loan is secured against your house. The catch is the term. A car loan might run four or five years. Your home loan runs for 25 or 30.
Why lumping it in costs you
If the car just disappears into the home loan, you're now paying it off at the same pace as the house. Your repayments drop, which feels good, but you pay interest on that car for decades.
Here's an illustrative example on $40,000 at 6.45% p.a. (the rate I used in my October examples; rates change):
Paid off over Repayment Total interest
4 years about $948 a month about $5,488
30 years about $252 a month about $50,545
Same $40,000, same rate. Stretching it over 30 years costs roughly $45,000 more in interest. The car will be long gone well before the debt is.
Illustrative only: principal and interest, monthly repayments, rate unchanged for the whole term. Doesn't include fees.
How does a split loan work?
A split loan is one home loan with the same lender, divided into two or more parts. Each part can have its own balance, rate type and repayments.
For my client, the home loan stayed exactly as it was. What used to be the car and personal loan became a second split. Yes, technically that's two loans and two sets of repayments. But he knows which split was the car, and any spare money goes straight onto that one.
Put the extra repayments on the car split and you can clear it on a car-sized timeline while still paying the mortgage rate. Once it's gone, you're back to just the home loan.
What to check before you split
Fees. Some lenders charge to set up or change a split, plus the usual refinance costs like valuation, discharge and application fees. Run those against the interest you'll save.
Variable or fixed. Most people make the car split variable so they can pay extra without break costs. Fixed splits often cap extra repayments.
Offset or redraw. If the car split has redraw, it's easy to pull money back out. That only helps if you're disciplined about it.
Borrowing power and equity. A bigger loan needs enough equity and income to back it. If it pushes your loan over 80% of the property value, lenders mortgage insurance may come into it.
When it doesn't make sense
If the car loan is almost paid off, rolling it in probably isn't worth the fees. Same if you know you won't put anything extra on the split, because then you're back to paying it off over 30 years with extra steps. And because it's now secured against your home, falling behind is a bigger deal than missing a car repayment.
Sometimes a personal loan or just finishing the car loan is the better call. That's worth working out before you sign anything.