Stark warning for car finance mortgages
Parker’s Car Guides, 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.
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.
There are still plenty of lenders willing to offer more conventional car loans out there; for the best advice on car prices and the complete guide to how to save money on the cost of motoring, Parker’s has just launched its ‘Cost of Motoring’ site, which provides users with in-depth news and top tips on how to save money and avoid getting crunched by credit. For more information see parkers.co.uk.