Use a Home Loan to Buy a Car, or a Car Loan?

Summary:

Choosing between a home loan and a dedicated car loan comes down to more than the monthly repayment. Getting it right can protect your next big purchase.

• You can buy a car through redraw or equity, but a lower monthly cost is rarely a lower cost overall.
• On an illustrative $30,000 car, interest runs around $4,749 over a 5-year car loan versus about $34,807 stretched across a 30-year mortgage, roughly $30,000 more.
• A car loan repayment is factored into your home borrowing power, while redraw or equity spends the equity you may need for your next property.
• If you are self-employed, a dedicated loan split into a separate account is far easier to trace for tax than redraw on a plain home loan. (General information, see your accountant.)
• The right path matches the tool to your goal, not just the cheapest headline rate.

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Introduction

You have built up redraw or equity in your home, you need a car, and the home loan rate looks lower than any car rate you can find. So the plan to use a home loan to buy a car feels like the cheaper move. Sometimes it is. Often it costs far more than the monthly figure suggests. The right answer depends on your borrowing plans, your tax setup, and the full-term cost. Fox Home Loans arranges both home loans and car finance, so we can put the real numbers side by side.

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Can you use a home loan redraw or equity to buy a car?

Yes, in a couple of ways, though cheaper each month rarely means cheaper overall. Redraw is the extra principal you have paid above your minimum repayments. It acts like cash you have saved, so you can pull it back out. Equity works differently, becoming a separate split added to your mortgage. Both routes spend money a depreciating car will never give back.

Redraw feels efficient because it is your own money. That is also the catch: there may be better uses for it than a car that loses value from the day you drive it home. The equity route tempts people because home loan rates look low next to car rates, so it feels cheaper. It can be, depending on how it is set up. Most lenders generally let you access up to around 80% of your property’s value, less what you still owe.

The quieter cost is what that equity could have done instead. Spend it on a car and you may not have it free to buy an income-producing asset later. For a fuller picture of the trade-offs, our guide on using your home equity walks through the options. A home loan health check can show what your equity is best kept for.

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Home loan or car loan to buy a car: what does each really cost?

A dedicated car loan usually costs far less in interest, because it runs over a shorter term. Picture a $30,000 car at an illustrative 6% per year. On a five-year car loan you pay around $4,749 in interest. Stretch that same balance across a 30-year mortgage at the same rate and interest climbs to about $34,807, roughly $30,000 more. These figures are illustrative only, not a quote.

As of August 2026, the Reserve Bank of Australia (rba.gov.au) cash rate has held at 4.35% since 17 June 2026. Home loan rates still tend to sit below car rates, which is exactly why redraw and equity look tempting. The trap is the term. A low rate spread across decades still adds up, because interest keeps compounding long after the car is gone.

Here is the same $30,000 across different terms, using an illustrative 6% per year modelling assumption. This is not a quote or an offer.

Illustrative only, based on standard loan amortisation at an assumed 6% per year. Not a quote or an offer. Your actual rate, repayment, and interest depend on your lender and situation.

Across published Australian examples, leaving a $30,000 car on a 20 to 30 year mortgage tends to add roughly $18,000 to $44,000 in extra interest. That compares with around $5,000 to $10,000 on a five-year car loan. The direction is always the same, even though the exact figures vary.

A dedicated car loan is built to clear a vehicle with the least interest over a shorter term. It stays separate from your home, you can pay it out any time, and some lenders even let you re-amortise, so your repayments reduce as you pay extra off. The Australian Government’s Moneysmart service makes the same point: compare the total cost over the full term, not just the monthly repayment. If a dedicated car loan is the better path, our sister brand Fox Finance Group can arrange the vehicle finance. Fox Finance Group holds Australian Credit Licence 382952.

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Does a car loan affect your borrowing power, and what if you sell the car?

Any existing repayment reduces how much a lender will let you borrow for a home, and a car loan is no exception. Lenders count the repayment in your serviceability, then apply a buffer on top. The upside is that only that repayment counts, not your home equity. Redraw or equity, by comparison, adds to your mortgage and eats into the equity you may need next.

That difference is not theoretical. One couple we worked with wanted a new car while saving toward their second property and first investment property. Using the equity in their home would have given smaller repayments, but it would have set them back over 12 months on that next purchase. Instead we structured a dedicated car loan. For serviceability we only had to factor in the loan repayment, which they passed comfortably, and they kept all their equity to leverage into the next property.

Selling the car later is cleaner with a separate loan too. A dedicated car loan can be paid out when the car goes, because it is not tangled up with your mortgage. Money pulled from redraw or equity does not simply disappear when you sell, since it is baked into the home loan balance. Our borrowing power calculator can help give you an idea of how an existing repayment changes the picture.

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Self-employed? Keeping car debt separate for tax: a loan split or redraw

If you are self-employed and the car has a business use, how you borrow can affect what you can claim. The general principle from the Australian Taxation Office (ato.gov.au) is straightforward. What sets deductibility is the use of the funds, not the security behind them. Interest is deductible only to the extent the borrowed money produces assessable income. This is general information, not tax advice, so confirm your own position with your accountant.

For that reason, redrawing on a plain home loan is usually the harder path. Once private and business spending mix in the one facility, the funds are very hard to trace, and the ATO treats it as a mixed-purpose loan you must apportion. A separate loan split, drawn straight into a dedicated business account, makes the money far easier to trace and show it was used for business only.

The cleaner setup tends to look like this. Draw directly from a newly created split into a business bank account. Keep strong documentation, such as contracts and invoices, proving the funds went to income-producing operations or business assets. Use an offset account rather than redraw for general savings, because moving money in and out of an offset does not change the loan’s underlying purpose. If you’re self-employed, we can help structure this with your accountant from the start.

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How to decide which path is right for you

Match the tool to your goal, not just to the lowest monthly repayment. Choose a dedicated car loan when you want the debt paid off fast, kept separate, and out of your home. Lean toward redraw or equity only when the cash is genuinely spare and not earmarked for something that will grow in value. If the car has a business use, structure it for clean tax tracing from day one.

A quick way to think it through:

• A dedicated car loan usually fits when you are planning another purchase soon, want the debt gone in a few years, or need to keep your equity free.
• Redraw or equity may suit when the money is truly surplus and you have no near-term property or investment plans. It fits only if you will still discipline yourself to pay the car portion down quickly.
• If you are already stretched on existing repayments, adding either is not the answer right now. A structure review is the better first step.

This is where running both sides pays off. Fox Home Loans arranges the mortgage and Fox Finance Group arranges the car finance. That means we handle the heavy lifting and show you the true full-term cost of each path, not the version a single online calculator flatters. You may be eligible for either route depending on your situation, and we will tell you plainly which one costs you less.

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Ready to see which path costs you less?

You do not have to work this out alone. Fox Home Loans can put the full-term cost of each path in front of you, manage the paperwork, and talk to the lenders on your behalf. A free, no-obligation chat costs nothing and will not affect your credit file. Apply online, or book a free structure review. Let Fox Home Loans, your trusted mortgage broker on the Sunshine Coast, show you the real numbers before you commit.