If your car loan has a higher interest rate than your home loan, it can be tempting to roll the remaining balance into your mortgage.
It may reduce your immediate repayments, but that doesn’t automatically mean it will save you money.
When deciding whether to consolidate a car loan into a mortgage, the repayment term can be just as important as the interest rate. A car debt that would normally be cleared within five years could potentially remain part of your mortgage for decades.
There are generally three options worth comparing:
- Keep your existing car loan.
- Refinance the car loan separately.
- Use your home loan to pay out the car loan.
Below, we compare how each option works and what borrowers should consider before making a decision.
Can You Add an Existing Car Loan to Your Mortgage?
Potentially, yes.
Rather than literally transferring the car loan into your mortgage, you would generally refinance or increase your home loan and use the additional funds to pay out the existing car finance.
For example, if you owed $30,000 on your car, you may be able to increase your mortgage by $30,000 and use those funds to clear the car loan.
Whether this is available will depend on your financial position, available property equity and the lender’s requirements.
If you’re already considering changing your home loan, you can learn more about the process on our home loan refinancing page.
What Equity, Income and Payout Details Does a Lender Assess?
Using your home loan to pay off a car loan generally requires the lender to assess the increased mortgage amount.
A lender may consider:
- Your available equity: The difference between your property’s value and your current mortgage balance.
- Your loan-to-value ratio: Increasing the mortgage may increase your LVR and affect the lenders or loan products available.
- Your income: The lender will assess whether your income supports the increased home loan.
- Your living expenses: Your regular household expenses will usually form part of the serviceability assessment.
- Your existing debts: This may include credit cards, personal loans, car finance and other commitments.
- Your car loan payout figure: The amount needed to completely close the existing car finance.
- Any balloon payment: Some vehicle loans have a larger final payment that also needs to be included.
- Refinancing costs: Fees associated with refinancing or restructuring the home loan should also be considered.
This is why comparing the interest rate alone does not give you the full picture.
Keep the Car Loan, Refinance It or Consolidate It?
There are three main ways you might deal with an existing car loan.
| Option | Potential Advantage | Potential Drawback |
|---|---|---|
| Keep the car loan | No need to restructure your mortgage and the debt remains on its existing repayment schedule. | You may continue paying a higher interest rate. |
| Refinance the car loan | You may be able to obtain a better car loan while keeping the vehicle debt separate from your mortgage. | The new rate may still be higher than mortgage finance and refinancing costs may apply. |
| Add the debt to your mortgage | The interest rate may be lower and you may be able to simplify your repayments. | Stretching the debt over a long mortgage term can substantially increase the total amount of interest paid. |
If you want to keep the vehicle debt separate from your mortgage, LoanBrix can also compare options through our car loan service.
Worked Example: $30,000 Over 5 Years Versus 25 Years
Consider a borrower with $30,000 remaining on their car loan.
For illustration only, assume:
- Existing car loan: 9.00% p.a. with five years remaining.
- Refinanced car loan: 7.50% p.a. over five years.
- Additional mortgage borrowing: 6.20% p.a.
These figures are examples only and do not represent a current LoanBrix lender offer. Actual rates, repayments, fees and eligibility will vary.
| Option | Term | Approx. Monthly Repayment | Approx. Total Interest |
|---|---|---|---|
| Keep existing car loan at 9.00% | 5 years | $623 | $7,365 |
| Refinance car loan at 7.50% | 5 years | $601 | $6,068 |
| Mortgage finance at 6.20% | 5 years | $583 | $4,967 |
| Mortgage finance at 6.20% | 25 years | $197 | $29,092 |
The 25-year option produces the lowest monthly repayment in this example.
However, it also results in approximately $29,092 of interest on a $30,000 debt if that additional borrowing remains outstanding for the full 25 years.
By comparison, using the 6.20% mortgage rate while still repaying the $30,000 over five years results in approximately $4,967 in interest.
This is why simply comparing interest rates can be misleading.
Why the Loan Term Matters Just as Much as the Rate
A lower mortgage rate can make consolidating a car loan look attractive.
But the biggest risk is allowing short-term car debt to become long-term mortgage debt.
In the example above, spreading the additional $30,000 across 25 years reduces the required monthly repayment to around $197.
That may improve short-term cash flow, but the borrower could ultimately repay close to $59,000 in principal and interest over the full term.
A lower repayment therefore does not necessarily mean a cheaper loan.
If you use a home loan to pay off a car loan, it can be useful to compare both:
- the minimum repayment created by adding the debt to the mortgage; and
- the repayment required to clear that additional debt over approximately the same period as the original car loan.
This gives you a more meaningful comparison of the total cost.
What About Payout Fees, Balloon Payments and the Old Security?
Before refinancing an existing car loan, obtain an up-to-date payout figure from the lender.
The payout figure may not be identical to the balance shown in your online banking.
Depending on the loan agreement, the payout amount could include:
- the outstanding principal;
- accrued interest;
- early termination or administration fees;
- other applicable payout costs; and
- any remaining balloon or residual payment.
If the car loan is secured against the vehicle, the existing lender will also need to finalise its security interest once the loan has been completely paid out.
These costs should be considered when comparing whether it is worthwhile to refinance a car loan into a mortgage.
Can the Consolidated Debt Be Kept on a Shorter Repayment Schedule?
This can be one of the most important parts of the strategy.
Depending on the lender and home loan structure, the additional borrowing may be able to be kept in a separate loan split.
For example, rather than simply adding $30,000 to a mortgage with 25 years remaining, you could calculate the repayments needed to clear that additional $30,000 over five years.
This can make it easier to:
- track how much of the mortgage relates to the previous car loan;
- maintain a shorter repayment schedule;
- avoid relying on the minimum 25 or 30-year mortgage repayment; and
- see when the former car debt has actually been repaid.
Otherwise, you could potentially still be paying for a vehicle long after it has been sold or replaced.
Whether a separate split is appropriate will depend on the lender, loan structure, fees and your circumstances.
When Might Keeping the Car Loan Separate Make More Sense?
Consolidating isn’t automatically the right answer.
Keeping your existing car finance or refinancing the car loan separately may make more sense where:
- there is only a short period remaining on the existing car loan;
- the existing interest rate is already competitive;
- the savings from refinancing would be relatively small;
- car loan or home loan refinancing costs outweigh the potential benefit;
- you don’t want to increase the debt secured against your home;
- increasing the mortgage would push your LVR higher;
- you don’t have enough equity to increase the home loan; or
- you are unlikely to maintain the higher repayments required to clear the additional debt quickly.
On the other hand, consolidating may be worth investigating where there is a meaningful difference in rates, sufficient property equity and a clear plan to repay the additional borrowing over a shorter period.
The answer depends on the total cost, repayment term, loan structure and your individual circumstances, rather than simply which option has the lowest interest rate.
What Should You Bring to a Broker?
If you want to compare keeping, refinancing or consolidating your car loan, it helps to have:
- your latest home loan statement;
- your current car loan statement;
- an up-to-date car loan payout figure;
- details of any balloon or residual payment;
- your current car loan repayment;
- recent income information; and
- details of your other debts and financial commitments.
A broker can then compare the cost of keeping the existing finance against a standalone car loan refinance or restructuring your home loan.
If a standard car loan or home loan restructure isn’t suitable, you can also read our guide to personal finance options when other loans don’t fit.
Frequently Asked Questions
Is it cheaper to add a car loan to a mortgage?
It can be, but not automatically.
A home loan may have a lower interest rate than a car loan, but extending the debt over a much longer period can increase the total interest you pay.
The rate and repayment term should therefore be considered together.
Can I refinance a car loan into my mortgage?
Potentially.
This will generally involve increasing or refinancing your home loan and using the additional funds to pay out the existing car loan.
Approval will depend on factors including your property equity, income, living expenses, existing debts and the lender’s credit policy.
Does consolidating a car loan reduce repayments?
It may reduce the required monthly repayment, particularly if the debt is spread across a longer mortgage term.
However, a lower repayment does not necessarily mean the loan will cost less overall.
Should I refinance my car loan instead?
A standalone car loan refinance is worth comparing before moving the debt into your mortgage.
It may allow you to obtain a lower car loan rate while keeping the debt on a shorter repayment term and separate from your home loan.
Can I add a car loan to my home loan without refinancing the entire mortgage?
Potentially.
Some lenders may allow an existing borrower to increase their home loan or create an additional loan split rather than refinancing the entire mortgage to another lender.
Availability will depend on your current lender, available equity, serviceability and lending policy.
Is it better to repay the consolidated amount over five years?
If the objective is to reduce the cost of the former car debt, keeping the repayment period relatively short can make a significant difference.
Using a lower mortgage rate while continuing to repay the additional borrowing over approximately the original car loan term may result in significantly less interest than spreading the debt across 20, 25 or 30 years.
Should You Consolidate Your Car Loan Into Your Mortgage?
There is no single answer that works for every borrower.
The most useful comparison is generally between:
- keeping your existing car loan;
- refinancing the car loan separately; and
- using mortgage finance to pay the car loan out.
The important part is comparing more than the interest rate.
Look at the repayment period, payout costs, home loan refinancing costs, total interest and how quickly you intend to clear the debt.
If you are considering adding your car loan to your mortgage, contact LoanBrix to compare the available options.
The figures shown in this article are illustrative examples only and do not represent an offer, quote or recommendation. Interest rates, fees, repayments and lending criteria vary between lenders and borrowers. Consider your circumstances and the relevant loan terms before making a financial decision.
