Put the car on the mortgage?...

[ferrari_chris]

Monetary advice needed here.

My 'friend' has a mortgage he'll be paying for the next 29+ years. He also has a car he'll be paying off for the next 12 months. (The third year on his three year payment plan) The interest rate on mortgage is around 8.5%, and the interest on the car is around 12.5%.

I think the car payments come out at around $100 a week at the moment. I don't know what the mortgage payments are.

I suggested he put the remainder of the car finance onto his mortgage, and pay that off in a lump sum. That will mean he'll own the car outright then, and it'll get that $100 a week back. It's a small drop in the ocean compared to his mortgage, so it'll only extend his payments out a couple of months or so. Also, that mortgage interest rate is less, so he'll be better off that way too.

But then it was mentioned that in doing that, he'd then be paying for the car for the lifetime of his mortgage as well, and even though the interest rate is less, it'll work out to be far more in dollar terms.

What are your thoughts on this matter? Is it better to keep the current situation and pay the car off over the next 12 months, or put it on the mortgage to get the $100 a week back now?

 

[Gashlycrumb]

Putting a car on the mortgage is one of the most stupid things you can do. As you say you are effectively paying a car off for 25 years. It is better to take the hit on the interest rate and pay it off quicker. 12.5% of car value x 3 years is much cheaper than 8.5% of car value x 25 years. Especially as he is unlikely to still have the car in 25 years time.

 

[Duke]

Especially since he only has 1 year left on the car payments.

PLUS, you can't just "put the car on the mortgage". He'd have to refinance the house in order to get the cash out to pay off the car loan. He'd definitely be losing money in both the long and the short terms. His best bet is to just pay off the car normally and hope his credit improves to the point that he doesn't get raped on interest rates like he currently is.

 

[ROAD_DOGG33J]

But then it was mentioned that in doing that, he'd then be paying for the car for the lifetime of his mortgage as well, and even though the interest rate is less, it'll work out to be far more in dollar terms.

Yep, pretty much

 

[Omnis]

Debt is a devil. I'd go with Duke on this one.

 

[Gashlycrumb]

Especially since he only has 1 year left on the car payments.

PLUS, you can just "put the car on the mortgage". He'd have to refinance the house in order to get the cash out to pay off the car loan. He'd definitely be losing money in both the long and the short terms. His best bet is to just pay off the car normally and hope his credit improves to the point that he doesn't get raped on interest rates like he currently is.

12.5% interest is actually pretty good for a car loan in New Zealand and 8% is very good for a home loan. The Reserve Bank's Official Cash Rate is now 8.25%, thank you very much Mr Bollard and Dr Cullen!

 

[Kylehnat]

^Really?? Both of those rates are astronomical in the U.S. for someone with decent credit.

 

[Gashlycrumb]

The Reserve Bank cranked up the OCR to try and control the housing boom, which was causing inflation. They were then suprised when the NZ dollar went through the roof. It doesn't take a rocket scientist to figure which dollars people are going to buy when you can get 8% p.a. for just having your money sitting in a six month term deposit vs 4% in most other countries.

If you think 12.5% is bad check this out: http://www.interest.co.nz/carloans.asp These are all for people with good-excellent credit history. For poor credit you are looking upwards of 25%.

 

[ferrari_chris]

Cool, thanks everyone.

I think we have a definitive answer here.

 

[Duke]

12.5% interest is actually pretty good for a car loan in New Zealand and 8% is very good for a home loan. The Reserve Bank's Official Cash Rate is now 8.25%, thank you very much Mr Bollard and Dr Cullen!

Ouch! Both my car loan and my house mortgage are under 4%.

 

[Wenders]

Putting a car or any other borrowing needs onto a mortgage isn't such a silly idea. In Australia it's the cheapest interest and most banks offer some sort of package that gives discounts/nil establishment fees and monthly service fees. To make it worthwhile, in terms of interest savings, you need to pay it off over a short loan term (1-5 years).

 

[Duke]

It may be the cheapest interest RATE, but the longer you drag the payments out, the larger amount of interest you accrue, and mortgages are designed to drag out how long you have their money. So in the long run it costs more in dollars even if the annual percentage rate is lower.

 

[Omnis]

... Unless there is some way to pay double at the last month of every year or something.

 

[Duke]

Well, I double the principal portion of my mortgage every month, without fail. Including our refinance, that's going to cut a 30-year mortgage down to about 17 years. But it is NOT going to gut it down to less than 10 years.

 

[Omnis]

Yeah. I wouldn't do that for this situation anyway.

 

[Wenders]

It may be the cheapest interest RATE, but the longer you drag the payments out, the larger amount of interest you accrue, and mortgages are designed to drag out how long you have their money. So in the long run it costs more in dollars even if the annual percentage rate is lower.

Maybe they do things differently in US. We can structure a mortgage over anything from 1-30 years and most mortgages allow extra repayments, some fixed interest ones only allow an extra 10k a year.
20k at our standard variable rate of 8.57% repayments are $412Pm on a 5 year term, total interest $4600approx.
20k at 13.7%, which is my banks standard personal loan rate for unsecured lending(definately not the cheapest rate), repayments are $463PM for a 5 year term and total interest $7700.
Make your repayments fortnightly or weekly and reduce the term and total interest charged. I pay my mortgage fortnightly (half the monthly contracted amount) which reduces the loan term from 30 to around 23 years. Even an extra $10FN cuts the term down another year. Every little bit helps.

 

[Danoff]

Strictly speaking, the only thing that matters is the rate - not how long it takes to pay it off. The reason being that you have cash in the meantime that you can invest and get a return or simply keep making the car payments, but make them to the mortgage.

From a pure dollars and cents point of view (assuming no transitional friction), putting the car on the mortgage is a smart move because mortgages are tax deductible, so the rate is going to be even better than the comparison you posted.

But practicality kills this plan.

Refinancing to do this is not an option due to frictional costs with the bank and the fact that refinancing should be based on current interest rates rather than the purchase of a car which... as was previously stated... is a drop in the bucket.

A home equity loan would be a better way to go about tapping into the mortgage to pay for the car - but you can't just take money out of your house. You have to use it on the house, so there's a bit of fraud to be done with the bank to pull that off. Also, there are frictional costs with home equity loans, plus you have to actually have equity in the home to be able to pull it off.

Attempting to lump it in from the get-go is going to boost your interest rate on the entire thing because the money presumably comes off of your down payment. So that option is out as well.

Basically there's no good way to do this. Personally, I hate car loans. Both of my cars were bought with cash, and I see that as the way it will be for me from here forward. I figure if I can't save the money up ahead of time to buy the car, I shouldn't own it.

Your buddy should just pay his car off as quickly as possible and try to avoid all future car loans.

 

[Gashlycrumb]

mortgages are tax deductible

Not in New Zealand they aren't. Unless you are a registered company or sole trader, even then only mortgages on rental/investment properties can be claimed. Including your private car on a business mortgage would be seriously frowned upon by the tax department, unless of course you pay Fringe Benefit Tax (up to 45% of the benefit - car value in this case) which would more than negate any savings.

The rest of your points are very valid though 👍

 

[Wenders]

Strictly speaking, the only thing that matters is the rate - not how long it takes to pay it off. The reason being that you have cash in the meantime that you can invest and get a return or simply keep making the car payments, but make them to the mortgage.

From a pure dollars and cents point of view (assuming no transitional friction), putting the car on the mortgage is a smart move because mortgages are tax deductible, so the rate is going to be even better than the comparison you posted.

But practicality kills this plan.

Refinancing to do this is not an option due to frictional costs with the bank and the fact that refinancing should be based on current interest rates rather than the purchase of a car which... as was previously stated... is a drop in the bucket.

A home equity loan would be a better way to go about tapping into the mortgage to pay for the car - but you can't just take money out of your house. You have to use it on the house, so there's a bit of fraud to be done with the bank to pull that off. Also, there are frictional costs with home equity loans, plus you have to actually have equity in the home to be able to pull it off.

Attempting to lump it in from the get-go is going to boost your interest rate on the entire thing because the money presumably comes off of your down payment. So that option is out as well.

Basically there's no good way to do this. Personally, I hate car loans. Both of my cars were bought with cash, and I see that as the way it will be for me from here forward. I figure if I can't save the money up ahead of time to buy the car, I shouldn't own it.

Your buddy should just pay his car off as quickly as possible and try to avoid all future car loans.

You guys definately do it differently in US than we do here.
We can use equity in home to borrow for anything other than business purposes and illegal uses (drugs, guns, terrorism etc). People over 65 can even borrow against their house to finance their retirement and not have to pay it back, loan gets paid off at death or when house is sold. There are guarantees against the debt exceeding the value of the house, there are issues with family members having their inheritance being spent.

We have no tax decuctabilty with a home loan, if the loan is for investment purpose you can negatively gear it and offset the costs invloved against the money made to reduce the amount of income tax you pay. In South Australia if you are borrowing to renovate your house then you don't have to pay any government stamp duty but borrowing for other purposes you do, on 20k its a couple of hundred dollars. This isn't the same for all states in OZ though.

Establishment costs on a homeloan are slightly higher than for a personal/car loan but interest savings far outway the additional costs and most banks have some sort of loan package that means you don't have to pay these fees for any additional borrowing.

 

[Danoff]

Not in New Zealand they aren't.

Interesting. I kinda wish they weren't here.

We have no tax decuctabilty with a home loan

It makes homes one of the best investments over here - which really spurs real estate prices. Because of the fact that the bank gets paid the full interest rate, but the borrower gets a kickback on his taxes, homes become a great investment - not just owning a home, but owing a lot on the home. It gives you a tax advantaged leverage in a decently appreciating asset that's hard to ignore.

I know some people actually borrow against their house any chance they get and put the money in the market.

 

[wfooshee]

People over 65 can even borrow against their house to finance their retirement and not have to pay it back, loan gets paid off at death or when house is sold. There are guarantees against the debt exceeding the value of the house, there are issues with family members having their inheritance being spent.

That's being marketed here now as a "Reverse Mortgage." It'd really piss me off if my Dad did that and my siblings and I lost the inheritance of his house, which is his only major asset, what with using his retirement investments to actually live while retired.

 

[Wenders]

That's being marketed here now as a "Reverse Mortgage." It'd really piss me off if my Dad did that and my siblings and I lost the inheritance of his house, which is his only major asset, what with using his retirement investments to actually live while retired.

Most families don't like them. What get's me though is we'll get some little old lady who has nothing but her home and a government pension, which is hardly enough to live on, she needs a little extra cash because she needs to do urgent repairs on her house and her family talks her out of spending their inheritance but sure as hell they don't help her finance the repairs needed.
They aren't for everybody but there are a lot of asset rich people who don't have much in way of cash. I don't have a problem with them, I personally don't believe in expecting and inheritance when my parents die.

 

[Gashlycrumb]

I personally don't believe in expecting and inheritance when my parents die.

👍 I couldn't agree more. I am not expecting anything from my parents when they eventually shuffle off this mortal coil. Thankfully they are secure enough not to need to resort to a reverse mortgage, but if they chose to sell everything up and spend their last years travelling the world and enjoying themselves I couldn't be happier. Even if it means that they leave me nothing.

My parents worked hard for what they have and it is their's to spend how they chose. If they want to leave me something, great, if not, so be it. I have another 60 or so years to make my own way on this planet.

 

[ferrari_chris]

...I don't have a problem with them, I personally don't believe in expecting and inheritance when my parents die.

👍 I couldn't agree more. I am not expecting anything from my parents when they eventually shuffle off this mortal coil. Thankfully they are secure enough not to need to resort to a reverse mortgage, but if they chose to sell everything up and spend their last years travelling the world and enjoying themselves I couldn't be happier. Even if it means that they leave me nothing.

My parents worked hard for what they have and it is their's to spend how they chose. If they want to leave me something, great, if not, so be it. I have another 60 or so years to make my own way on this planet.

Must be a southern hemisphere thing?

Agree 100% on all points. 👍

 

[Casio]

The thing is that by the time most of our parents die we'll most likely at like be over 50, if not approaching 60. At which point coming into a lot of money probably won't be as important.

It'd make a lot more sense to give inheritance to your children when they are coming up to buying there first house or something.

 

[Wenders]

It'd make a lot more sense to give inheritance to your children when they are coming up to buying there first house or something.

Bugger that, Jack can buy his own house and get a job and become rich and then look after me in my old age

 

[Cap'n Jack]

Bugger that, Jack can buy his own house and get a job and become rich and then look after me in my old age

No dice.

 

[Jay]

The thing is that by the time most of our parents die we'll most likely at like be over 50, if not approaching 60. At which point coming into a lot of money probably won't be as important.

The money is very important at that age, how do you think they afford those brand new fancy convertible sports cars?

 

[Danoff]

Bugger that, Jack can buy his own house and get a job and become rich and then look after me in my old age

You jest (I assume), but some of us have parents that are counting on that in retirement. Funny thing is, my folks are over 50 and still getting support from their parents. How, you ask, does it make sense to expect to receive from both your parents and children? I have no idea.

 

[Wenders]

You jest (I assume), but some of us have parents that are counting on that in retirement. Funny thing is, my folks are over 50 and still getting support from their parents. How, you ask, does it make sense to expect to receive from both your parents and children? I have no idea.

Jack will probably have to look after me since the way he is going he will never move out of home but what I am really counting on is his sister becoming a rich Doctor and she can keep me in a style I'd like to become accustomed to.