Cars on mortgages heading for a big crash

publication date: Jul 9, 2008

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author/source: Robin Roberts

Britain’s biggest and best-selling car price guide, is warning car buyers who increased their mortgages to finance new cars that they could be left with a serious financial headache.

As if rising utility, fuel and food bills aren’t bad enough, those who re-mortgaged their homes to pay for a new motor could be left with a car that’s plummeted in value, while their loan repayments have increased, accorinding to Parkers.

Recent figures released from the Bank of England show that UK home owners have borrowed around £311bn since 2000 to spend on things other than their homes. Those who have done this in order to afford a new car could be throwing literally thousands of pounds away on unnecessary interest charges, meaning that they could be looking at a total bill that amounts to twice the cost of their car.

For example, a car that cost £14,000 that was financed by taking out a mortgage at 7.2% could amass a total cost of £30,000 at the end of the agreement – whereas if the car had been bought with a standard car loan of 7.7% APR, the full cost would have still been under £16,000.

Although many car buyers may have accepted the higher overall repayments that come with a 25 year loan in return for lower monthly repayments, others may not have been aware of the cost; and if interest rates climb higher and if interest rates rise further, some car buyers will find that they’re paying out a lot more than they originally expected. And then there’s the issue of depreciation – cars, unlike houses are worth less over time.

Kieren Puffett, Editor of Parker’s explains: “As house prices continue to fall and repayment rates start to rise, some car owners will find that it wasn’t such a good idea to pay for a new car with the equity of their home. In the most extreme cases, home owners who financed their lifestyle – including new cars – with this money, could find themselves 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”.

“The trouble with paying for a car by re-mortgaging is that unlike your house, a car does not appreciate in value over time. Many owners will find that they are still paying for a car that was scrapped many years ago by the time their mortgage comes to an end”.

Parker’s advice to car owners who have opted to pay for a new car through a mortgage is to seek financial advice as soon as possible.

If your mortgage allows you to make overpayments – and you can afford to – Parker’s suggests aiming to get the amount you borrowed paid off as soon as possible to avoid paying sky high interest on a car that will have already dropped in value.

And if you are currently thinking about your mortgage as a financial option for a new car, Parker’s strongly advises against it – not that many banks or building societies will lend the money in the current economic climate.

Average standard variable rate: APR: 7.2 over 300 months (25 years)

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
Cost of the loan: £1723.87

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
Cost of the loan: £2911.23