From 1 July 2023, there are changes in support for first home buyers in Australia.…
When it’s time to go looking for a new car to get you from A to B, you can quickly lose sight of the purpose of purchasing and get distracted by the fancy features and the status that comes along with the car of choice. Pride can quickly get in the way of common sense when buying a car, so what car can you really afford? What can you handle driving around, knowing you’ve got a good balance of common sense and a decent ride? Let us work out whether or not new cars, with all their great features and new car smell are really that bad for your bank balance. While we’re at it, let’s figure out how much you should spend on your next car, which generally speaking, should be as little as you can get away with.
Strike A Balance
Cars are going to cost you money, whether you buy a luxury model or a lemon. If you buy a very old car, you could be left with ongoing repairs and spare part costs. A nice new car on the other hand, can potentially cost someone’s yearly income and trap you into years of repayments. The right balance is easy to find however, by buying a car that is reliable and fitting to your lifestyle, without breaking the bank.
When purchasing your next car, it is important to get advice to assess your income, lifestyle, and priorities in order to buy a vehicle that you are satisfied with.
How Much Does It Really Cost To Own A Car?
When it comes to buying a new car, it is easy to look at the advertised price and justify being able to pay for it. But there are plenty of costs associated with owning a car that are not often considered at the time of purchase. You need to consider your registration and pink slip, comprehensive insurance, fuel consumption, application fees, servicing and on road costs when factoring a new car into your budget.
While we are on the subject of budget, it’s important to take an honest look at your expenses before taking out a car loan. This will work out what your regular expenses are and what room is left to be able to fit in monthly car repayments. You will need to work out whether you are willing to adjust your spending (e.g., dining in more often, taking your lunch to work). This being said, it is a tricky business borrowing money for anything that goes down in value, so it’s advisable to get some advice from your mortgage broker to work out what repayments you could afford and what would be the best loan would be for a new car purchase. It is important to only borrow what you need to minimise interest and take steps to pay off that loan as quickly as possible, whether it’s with your tax refund or some extra cash made through a side hustle. Make your repayments regular and rounded up, perhaps by an extra $50 a month so tackle the loan and avoid interest at all costs.
Consider Buying A Car With Cash
Most of us know that a car will depreciate over time. But here is something not everyone will tell you; new cars will depreciate a whole lot faster than used cars. In fact, the minute you drive your sweet new ride out of the dealer’s lot, it will have lost between 9-11% of its value. So, if the car was $40,000 initially, you will burn up to $4,400 just driving it away. After a year of ownership, your not so new car will have lost about 20% of its value (which is $8,000 from a $40,000 car). Fast forward to five years and your car will now be 60% less valuable than the day you laid eyes on it. That is $24,000 off your original $40,000 car.
However, consider the idea of buying a new looking car that is only a few years old. Someone else has paid the full price and faced depreciation, leaving you with a nearly new car for a considerably cheaper amount.
To put this into perspective, let us look at a case where you decide to purchase a brand-new Mazda 3 out of the dealer’s lot for $30,990. You pay for it using a car loan at an interest rate of 4.99% over a 5-year term. That is $584.68 a month in repayments. After 5 years of owning your Mazda 3, the value of your car has now dropped to $18,594. However, after 5 years of interest, you will have paid about $35,680 in repayments.
Now, let us rewind and say you didn’t decide to walk into that dealership and instead, purchased the same Mazda 3 that was a few years old from the used car online classifieds. You found a great buy at $15,000. You bought the car outright with your savings and instead saved that monthly ‘would be’ repayment of $584 in a savings account. After five years you would have saved over $35K to put towards a new car. You could even put that money in an investment account or your superannuation and be laughing at retirement. $584 in an investment account per month over 5 years could reap close to $40,000, more than enough to buy your next car with cash.
|5-year Loan, 4.99%
|Total Cost of Car
|Savings per month
|Total Savings over 5 years
|Total savings if invested (assuming 6.62% pa return*)
*based on Vanguard Balanced Investment showing 5-year return of 6.62%. The above is an example used to highlight costs. Actual figures may vary.
Using A Redraw Facility
If you have found yourself ahead on your home loan, you may find yourself with equity that is available to redraw. There may be an opportunity to put that equity towards your next car, but there is a lot to consider first.
Using a redraw facility is an easy and straightforward way to find finance for your next car. There isn’t a drawn-out application process to a new lender, and the regular repayment is bundled together with your mortgage. However, while the interest rate on a redraw is much lower than that of a car loan, you would need to consider that the life of the loan is much longer. A car loan term usually runs for an average of five to seven years, while a mortgage may be up to 30 years. The longer you are paying off your car within your mortgage, the more you will be paying.
As a guide, adding an extra $35,000 onto a $400,000 home loan can mean paying as much as $18,122 more in overall interest2. That is more than half the cost of the car.
Do not forget that depreciation rule that we talked about earlier. As soon as you have driven your new car out of the dealer’s lot, it has depreciated dramatically. This is definitely not seen as good debt to have, so it’s savvy to talk to your mortgage broker to work out the most cost-effective way to borrow, for least amount of time necessary. It can also begin to feel quite easy and natural to borrow this way for other big toys and lifestyle buys. This can quickly lead you down a slippery path of unnecessary debt and bigger repayments.
Using a Novated Lease
You can get a novated lease by including a car into your salary package as a salary sacrifice. This might also include your petrol, regular car service and car insurance too.
A novated lease is usually for a new car or a slightly used car from a leasing company. When on a novated lease, you do not own the car. You are ‘borrowing’ the car from the leasing company until you have paid it off. The car can often be bought with a fleet discount. There are some great advantages to having a car through a novated lease.
Your monthly car lease payments do not actually cover the whole cost of the car, you are paying for the use of the car and the cost of depreciation over the term of the lease. Even though the monthly payments are cheaper, the total cost of the lease is usually higher – especially if you decide to hang on to your car for a longer period.
On a novated lease you do have the option to keep your car updated often, not to mention reduce your taxable income each year.
You will need to be fully aware however, that on a novated lease you do not actually own the car. You are essentially borrowing it throughout the lease. It is not your asset and you cannot modify it in any way. You may also be limited for choice on make and model, depending on the availability of certain cars within the lease. When agreeing to a novated lease, you are also agreeing to only drive a certain amount of kilometers each year, to keep an accurate understanding of the wear and tear on the car. There may be extra fees involved if you go over a certain distance within a year.
Buying A Car With A Car Loan
The alternative to a novated lease is to pay for it with cash or to apply for a car loan. This can be done at the dealership, or through a mortgage broker. If going through the dealership route, make sure you are getting terms that are flexible, an interest rate that is competitive and ongoing support that you require. It is important to shop around for quotes before you sign on the dotted line. A great way to ensure you are suited to the right loan is to get advice from your mortgage broker, who can help you find competitive terms and interest rate for your finance.
When you take out a traditional car loan, the car is seen as your asset. This means you own the car, can modify it, and drive it as much as you want. You are able to sell it when the time is right for you, as opposed to a novated lease, where you are unable to sell it until it is paid off in full.
When you have a car loan though, you need to be ready to pay those high monthly payments, so it will pay to check out your budget with your financial planner or mortgage broker to ensure you are ready for what you’re getting into. Those ongoing road and maintenance costs all land on you too, so this will need to be factored into the cost of the car. Let us also repeat that depreciation rule one last time, shall we? While you are paying off your car loan, your car is depreciating in real time. So, get advice to ensure you are getting into a loan that you can pay off efficiently, on terms that you can handle.
When it comes to buying a car, there are so many factors to compare to ensure you are making a smart decision. It is always a good idea to obtain solid advice when heading into a big purchase like a new (or slightly used) car. Call Watson Mortgages on 02 4038 1623 to make an appointment to speak to your mortgage broker today, to talk about your options and objectives.
Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Credit Representative 525053 is authorised under Australian Credit License 389328.