On the face of it, the cheapest form of finance is your mortgage, with standard variable rates averaging 3 to 3.5%. These days, most home loans come with an offset or redraw facility that allows you to make extra repayments whilst still having access to money if you need it.
How easy is this? Redraw $30,000, pay cash for the car (perhaps even after negotiating a discount) then drive off into the sunset!
But there’s a catch. Whilst vehicle and equipment loans (also known as asset finance loans) have one to seven-year terms, your mortgage may have 20 years left to run. And the longer you owe money on your car or plant and machinery, the more it costs you.
Sure the rate of the home loan is lower than an asset finance loan, but let’s have a look at the impact on a mortgage with a balance of $250,000 and 20 years left to run.
At an interest rate of 3.5%, repayments on $250,000 over the next 20 years will be $1,446 per month. Once you borrow the additional $30,000, if you don’t extend the term of your loan, the repayments will be $1,619 per month – an increase of $173. Over the next 20 years, if you are like the majority of Australians and only make the minimum repayments the total you will pay back is $41,520 – a total of $11,520 in interest. Congratulations you’ve just turned a family sedan into a prestige convertible vehicle!
In comparison, an asset finance loan at 5.00% would only cost around $3,833 in interest over five years.
You don’t want to spread the cost of your vehicle or plant and machinery over 20 years – just because you do that with your home loan doesn’t mean that you should do that with your vehicle or equipment. Also, by dipping into the extra repayments you’ve made on your home loan, you’re undoing all those years of hard work making additional repayments and you’re also diminishing the equity in your home.
Another downside can be the fees. Sometimes an additional lend on a mortgage can cost over $600 in establishment fees alone. The bank may also need a property valuation done by one of their valuers. This is often around $200. Then there are legal fees for preparing the new mortgage documents.
Finally, how close are you to borrowing over 80% of the property value? Note the value you think that your home is worth, but what the bank’s valuer thinks its worth? If it’s over 80%, you need to pay for mortgage insurance as well.
Unless your money is sitting in re-draw, the new lend will take on average 4 weeks to complete. This is fine if you have to wait for a car or truck to come in for example, not so much if you’re buying something readily available or require the car or truck to fulfil your work commitments. In comparison an asset finance loan can take on average 5 working days to complete.
Finally using asset finance to purchase a vehicle or equipment for business purposes can offer several tax advantages. Depending on what type of finance you get (i.e. chattel mortgage, finance lease, rental etc.), you may be able to claim your interest or rental repayments or depreciation on the asset – these business expenses can be brought forward so they can be deducted from this year’s taxable income.
If you want to find out more how I can help with your vehicle and equipment finance needs, please contact me.