We need to talk about Car Debt
I am currently working on scenarios for clients in terms of buying a home.
They recently bought a new car for $40k and financed it, costing them $250 per week in repayments. They have another car (Value $15k) that they have not sold yet that they could use, instead of the new car.
Option 1 – Sell the New Car, Keep the old car
The Potential home loan amount would be $560k, to be repaid over 20 years
The deposit is $140k
Purchase price $700k
Assumption: The car has not been sold for a loss
Option 2 – Keep the New Car, sell the old Car for $15k
The Potential home loan amount would be $450k, to be repaid over 20 years
The deposit would be $155k, considering the sale of the existing car
Purchase price $605k
The difference in approval amount is $ 110k between the 2 scenarios.
Keeping the new car would mean that the clients can only buy up to $605k potentially.
However, there are not any properties that are suitable for their family for less than $605k.
What is the effect of keeping the New Car?
This has a massive implication........
Let’s assume that the client decided not to sell the car and will keep on renting for 3 years, until the car has been paid off and then apply for a home loan.
Let’s further assume that property prices increase by 5% per year. That means that the $700k property they could have bought now is worth $810k in 3 years’ time.
So, the opportunity cost of keeping the car is equivalent to $ 110k, plus there is no guarantee that approval will be forthcoming plus, the deposit amount required considering a 20% deposit requirement would now be $ 162k.
My question is, is it really worthwhile holding onto the new car if the property that you are going to buy is going to cost you $110k more in 3 years’ time?
It is my role as an adviser to point these types of scenarios to clients, so that they can make an informed decision.
I have worked through scenarios like this, and some clients have indeed sold their cars, repaid the car finance on my advice then went on to buy their first homes.
They are now happily living in their homes and have not looked back since.