# Deciding on whether to redraw from mortgage

I'm trying to work out whether or not there will be any benefit in redrawing from my mortgage to pay off my car loan. The idea is that if I pay off the loan, I can use the monthly car payments as additional payments on my mortgage. The interest rate on my home loan is lower than what it is on my car.

I'm not sure what information you will need so I will list everything I think is relavent (please let me know if there is any other information required):

• Home Loan is at a variable rate (currently 5.59%)
• Will need to redraw approx \$10k to repay the car loan
• Car loan is at a fixed rate (8%), but I can get the 'payout' figure which is less than just paying the monthly repayments (still have 35 months to go on the loan)

What values should I be sticking in to which formula to work out whether or not there is any benefit?

• It sounds like a good idea and like your on the right track. There will definitely be a financial benefit to you. Do it. – Victor Jan 22 '14 at 10:26
• Check with a credit union - they often have some pretty good car loan rates. We just concluded buying a used car for my daughter to drive, and got \$16K at 1.75% for 60 months (no, that's not a typo - 1.75%) through my wife's CU. You might be better off re-financing this loan than tacking the value of it onto your mortgage. – Bob Jarvis - Reinstate Monica Jan 22 '14 at 18:10
• Which country is that in Bob? Note that the OP is in Australia. – Victor Jan 22 '14 at 19:38

For a short term loan, the interest is closer to straight line, e.g. A \$10K loan at 10% for 3 years will have approximately \$1500 in interest. (The exact number is \$1616, not too far off).

You will save 2.41% on the rate, so you'll the extra payment you'll send to the mortgage will save you about 10000*35*(2.41/12)/2 or about \$350 over the 3 year period.

• Thanks, could you explain how you got the 2.41% figure? – link64 Jan 22 '14 at 21:57
• Sure - 8% - 5.59% is 2.41%. This is the difference in rates. The savings is 2.41% (divided by 12 of course) of 10000 the first year, and slides to zero by the end, that's why the divide by two. – JTP - Apologise to Monica Jan 22 '14 at 23:17

You are saving around 2.41% over the Car Loan for a duration of 35 months. Check out if the fees for redrawing on home loan and fees for closing the matches the money saved.

Edit:
If you are making your current car payments as additional monthy payments to your mortgage then you are in effect paying less interest than current car loan.

• I have \$0 in fees for redrawing - I was interested in how much extra interest i'd be paying on my mortgage should i redraw approx \$10k to repay the car loan – link64 Jan 22 '14 at 8:58

Two principles in comparing different scenarios: 1) keep the two scenarios as equal as possible in amount and timing of payments; and 2) find the financial comparison at one particular point.

So, your car loan, \$10,000 for 35 months at 8% compounded monthly means you're paying \$321.29

Suppose you make the switch and keep on paying the same, mortgage and \$321.29 for the 35 months (see 1, above)

Those extra payments, continued for 35 months at your mortgage rate of 5.59%, will pay off a mortgage of \$10,354.10, which will more than pay off the \$10,000 you added to the mortgage In other words, making the switch will benefit you to the tune of 354.10 as of the day of the switch. You could ask the mortgage company to give you the \$10,000 and the \$354.10, and all your payments and amortization would stay the same... (see 2 above)

Of course, this is pretty much what Joe Taxpayer said...