When buying a new car, choosing the right financing option is crucial. Many buyers consider either a mortgage redraw or secured car loan, but which one is the smarter choice? Peter Watman, owner manager of AAA Finance, explains why redrawing on your mortgage can be detrimental to your long-term financial success.
Many a bank manager has told their clients that they have equity in their home and that they can use this equity to make purchases. A new car or caravan, some home renovations or even a holiday. Sounds tempting!
So, you decide to redraw on your mortgage to buy a new car. The bank calculates how much your repayments will increase over a 30 year term. The repayment increase is minimal and is easy to manage. Sounds great, but what are the pitfalls of using this equity?
Mortgage Redraw or Secured Car Loan | Let’s look at the figures…
According to the Australian Bureau of Statistics (ABS), the average mortgage size for owner occupiers was $642,121 in September 2024. In 2025 new car purchase prices start around the $21,000 mark for a Kia Picanto and go up to over a million dollars for a Rolls-Royce Phantom Extended Wheelbase. The average spend on an SUV is $39857 according to Canstar. $40,000 will get a new Hyundai Tucson, Kia Sportage or Mitsubishi Outlander. For this example, I will use a $642K mortgage with a $40K new car purchase.
Figures for redrawing on your mortgage
As an example, a mortgage for $642K at an interest rate of 5.74% over a 30-year term would cost $705,280 in total interest.
If you added a car purchase amount of $40,000 to your mortgage, the new mortgage amount will be $682K. A $682K mortgage at an interest rate of 5.74% over a 30-year term would accrue a total interest of $749,226. Effectively, by adding the purchase price to an existing mortgage and not paying any additional amounts to offset the increase in mortgage size, an additional $43,946 in total interest is paid. Your new car has actually cost you $83,946. That’s more than double the original purchase price!
If you do redraw on your mortgage you need to know how much extra you need to pay as additional repayments to make sure you pay off the asset over a reasonable amount of time, such as 5 years. If you do not make these additional mortgage top up repayments, you end up paying your new car off over a 30-year period. The car is not so new then!
Figures for a secured car loan
If you were to get a secured car loan the interest rate would be higher but the term shorter. Although the interest rate is higher, at AAA Finance we have access to over 40 different lenders and can get extremely competitive rates. For an asset-backed client, i.e. for those with a mortgage or who own their own home, a new vehicle interest rate is currently 6.99% as of 25/02/25. This interest rate is fixed for the life of the secured car loan. Car loan terms range from 2 to 7 years and in this example, we will work on the average loan term of 5 years.
A secured car loan for $40,000 at an interest rate of 6.99% will accrue a total amount of interest of $7,511 over a five-year term. Your new car would cost you $47,511 at the end of 5 years.
Mortgage redraw $83,946 v’s Secured car finance $47,511 = $36,435
That is a HUGE saving of $36,435 using a secured car finance option!
Mortgage redraw or secured car loan—the evidence is clear: a secured car loan is the smarter choice, offering better financial stability and faster repayment.
Upfront, it is quite easy to make the mistake that the lower interest rate of a mortgage will be better than that of a secured car loan. As shown above, even though you are paying a higher interest rate the total amount of interest will be significantly less because the term is so much shorter. It does not make financial sense to redraw on your mortgage to buy a new car UNLESS you make extra repayments.
But I will make extra repayments!
Lots of people have fallen into the trap of using their credit card to make purchases with the intent to pay off the credit card before the interest free period ends. It is tempting, but so many people don’t pay off their credit cards before the interest kicks in.
This is a similar situation when you are thinking of redrawing on your mortgage to make purchases. The big difference is that it is a much larger chunk of money.
People start out with the best of intentions, but the reality is that most people do not make these extra repayments. If you don’t make the extra repayments, then you will be significantly out-of-pocket in the long term.
Interest rates – variable mortgage or fixed secured car Loan
Another consideration when looking to redraw on your mortgage is interest rates. No one has a crystal ball to predict what interest rates will be next month, next year, let alone in 5 years’ time. With a secured car loan, the interest rate is fixed for the entire term of the car loan. This gives you absolute confidence in the total cost of purchasing a new vehicle.
Is that really equity?
A concerning situation for many homeowners is that, despite owning their property for 5 to 10 years, they may not have accumulated much “real or contributed” equity. This is often due to making only minimum mortgage repayments, which have primarily covered interest rather than reducing the principal balance.
Take a moment to ask yourself, “Where is my equity coming from?” Have I made significant progress in reducing my mortgage, or is my equity mainly due to an increase in the property’s value?
If the majority of your equity comes from rising property values, then in reality, this isn’t equity you’ve built through repayments—it’s simply a result of your home’s appreciation. When refinancing and tapping into this so-called equity, many homeowners are tempted to use it for purchases like a new car, boat, or caravan. While it may feel like you have more money available, it’s important to recognize that your mortgage is likely higher now than when you first purchased the property. This means that you are actually going backwards financially, despite feeling better off.
Using this “equity” in the short term can have significant long-term consequences. It could delay your retirement and impact on your overall financial stability. This will ultimately push back the date when you will finally own your home outright.
When will I own my own home?
When you refinance your home the term of the mortgage usually starts again. That is, your mortgage resets with a term of 25 to 30 years. Quite often, consumers are rolling their mortgage over and over. The property market goes up and they refinance. Interest rates go down and they refinance. They are consolidating the debt again and again without actually paying the debt down. And all the while extending the time to when it will be paid out. This is an extremely dangerous financial situation to be in. Do you still want to be working at 70?
Interest rates will go up!
House values may not go down significantly in the short term. Historically their value will only go up in the long term. But what about interest rates? Interest rates are predicted to be reducing this year in the start of an easing phase. Historically, interest rates go up and down in a cyclic fashion and at some stage they will go up again. Retirees still remember the days of 17% and 18% interest rates. While interest rates remain relatively low, people should be focused on paying off their mortgage debt as soon as possible.
But I want a new car! What should I do?
When comparing mortgage redraw or secured car loan options, a secured loan is the smarter choice for long-term financial stability. It comes with a fixed interest rate and loan terms ranging from 1 to 7 years, ensuring you make steady repayments on both your mortgage and your new asset. AAA Finance specialises in secured car loans—contact us today to speak with a finance expert or learn more about Secured Car Loans here.
What if I own a business?
If you are an ABN holder and can justify 50% business use of a new car purchase, then there is no doubt that you should get a business car loan. The most popular type of business car loan is a low doc car loan. Low doc car finance is quick and easy and has many benefits for the business owner. These include being able to claim the GST on the purchase price, the interest on the loan and the depreciation of the new car.
