Mortgage redraws leave borrowers ‘worse off’: RateCity

RateCity research has reported that using a mortgage offset or redraw facility to fund a car purchase could cost consumers tens of thousands of dollars if extra repayments are not made.

According to the loan comparison site’s data, while the average interest rate on a home loan (4.30 per cent) is lower than that of a car loan (8.31 per cent), borrowers could pay more than double the price of the principal on their car purchase if the vehicle is paid off over the life span of a mortgage.

According to RateCity, if a $30,000 car loan is paid off over 25 years, the consumer would pay a total of $77,710 for their car, with $47,710 being interest.

In contrast, RateCity’s research revealed that if a consumer paid an 8.31 per cent interest rate on a car loan of the same amount over five years, they would pay $6,769 in interest ($36,769 in total).

Further, if opting to finance their car purchase while making extra repayments through a mortgage redraw, consumers would pay $3,393 over five years on an interest rate of 4.30 per cent.

“Too often, people dip into their mortgages with little thought to the long-term consequences,” RateCity money editor Sally Tindall said.

“Compounding interest can leave a nasty sting in the tail if you take the money out of your mortgage and never get around to topping it back up.”

Findings are 'partly inaccurate' says finance broker

However, finance broker and principal of asset finance company Astute Ability Group Mhairi MacLeod told Mortgage Business that the research is partly “inaccurate”.

Ms MacLeod noted that based on her calculations, the total interest paid on a mortgage redraw for a $30,000 car loan over 25 years is much lower than the $47,710 figure reported by RateCity. 

“If you look at mortgage redraw over 25 years, the actual total interest is $19,009, with the total costs of the car being $49,009,” Ms MacLeod said. 

Ms MacLeod added that nine out of 10 borrowers don’t make extra repayments on their car loan and instead opt to repay their debt incrementally.

“Most [clients] whack it on the home loan, forget about it and end up paying the additional $19,009,” the principal added. 

“[The] failures are in human nature. If they don’t have to make the extra repayment, they won’t do it.”

Ms MacLeod also noted that interest payable on a car loan can be reduced without forcing a consumer to consolidate debt through their mortgage.

“You’ve got to bear in mind, too, that the total amount of interest payable on a secured car loan or on a personal loan can be reduced,” Ms MacLeod said. “So, depending on a lender and depending on where it sits, you can actually reduce that total amount of interest payable.”

Ms Tindall, however, advised consumers to avoid compounded interest by making regular principal payments on their loan.

“If you take money out of your offset account or redraw facility, make sure you put the money back, as soon as humanly possible,” the money editor said.

“The best way to do this is to set up an automatic payment, similar to what you would have paid if you’d taken out a car loan.”

[Related:  ‘Major flaw’ with mortgage comparison rates, says CEO]