We all want financial security and owning your own home is a huge part of that dream. However when car troubles strike, it can feel like your hard earned savings are caught in the crossfire.
Should you stick to the traditional ‘cash is king’ rule, or is there a smarter way to navigate a car purchase while on your path to homeownership?
Meet Sarah
Saver vs homeowner
Sarah is a hardworking 32 year old diligently saving for her first apartment. She’s amassed $50,000 in savings, however her trusty old car is on its last legs. A reliable vehicle is crucial for her commute to work and her lifestyle.
She’s thinking of spending $25,000 on a new or second hand car.
Sarah faces a classic dilemma…
- Pay to have the car repaired with no guarantee of longevity.
- Deplete her savings for a new or second hand car. Or
- Explore how financing a new or second hand car could work in her favour to maintain the potential of home ownership.
Why car finance could be the hero to protect your precious deposit for home ownership
Having a 20% deposit for your property may unlock lower mortgage interest rates and potentially eliminate hefty lenders’ mortgage insurance (LMI).
Sacrificing property savings for a car can have a ripple effect by costing more for the apartment purchase.
Using cash to purchase a car will delay entry into the property market.
If the property market is rising, not only is a higher price to purchase the apartment most likely, but so is the deposit required.
Cash ‘talks’ to lenders
Robust savings demonstrate financial stability, a key factor for mortgage approval. Draining half your savings for a car could weaken your application.
The maths of opportunity cost
Once you purchase a car and drive it away, it loses its value immediately. Instead of spending $25,000 to buy the car, Sarah could keep that money towards her deposit for the apartment and finance a new car.
CASH vs FINANCE
Let’s take a closer look
Option A
CASH FOR CAR means Sarah’s apartment dreams would take a hit as her deposit dwindles, potentially reducing her borrowing power and delaying entry into the property market. This will end up costing more in a rising property market.
Option B
FINANCE THE RIDE means her deposit remains strong by maximising her mortgage options and potential savings on interest and LMI.
No cash means no apartment for a few years, while financing the car means home ownership is still likely.
Challenging the ‘cash is king’ mentality
We get it – older generations swore by saving up and avoiding debt, especially when it came to buying a car. But today’s property prices demand a more strategic approach for our first home buyers.
‘GOOD’ debt vs ‘BAD’ debt
Car finance, secured against an asset (ie the car), may be considered ‘good debt,’ especially if it preserves your home deposit and helps you build a positive credit history.
The power of strategy
There are certainly times when paying cash outright for a car is the right choice. However, when a strong home deposit is crucial, let’s reframe our thinking.
Example
Sarah’s potential savings
Let’s say Sarah secures a car loan with a 7% interest rate and preserves most of her deposit.
With a modest apartment goal, avoiding LMI and securing a slightly lower mortgage interest rate may potentially save her thousands over the life of her loan.
Help is available
It’s hard to make this decision on your own. Before you go car shopping please contact the office so we can assess the impact on your borrowing capacity if you decide to finance your next car.
Let’s talk!