Calculator
Home Equity Loan vs. Auto Loan Calculator
Home Equity Loan vs. Auto Loan
Your Home Equity
The Car Purchase
Neither route is tax-deductible for a personal car — the ATO follows use of funds, and personal motoring is private. The equity route secures a depreciating asset with your home: match the repayments or the strategy backfires.
Interest Saved With Home Equity
$3,558.05
Comparison Analysis
The $40,000 needed costs $780.77/month at the 6.4% home-equity rate ($6,846.42 total interest) versus $840.07/month at the 9.5% car loan rate ($10,404.47 total interest). The equity route saves $3,558.05 in interest over 5 years with combined LVR moving from 50.0% to 54.4%. The saving is real, but the debt is secured by your home and interest on equity used for a car is not tax-deductible — only redraw if you will repay on the same schedule you would have paid the car loan.
*Estimates interest costs for both funding routes using the rates and terms you enter. Actual offers vary by lender, credit profile and security, and neither route is tax-deductible for personal vehicle use under the ATO's rules. Home-secured borrowing puts your property at risk. Educational only, not lending or financial advice.
Pay for the Car with the House? The Honest Trade-Off
Many Australian car buyers with equity in their home face a real choice: finance the car through the dealer or a secured car loan at 8–10%, or redraw against the mortgage at 6–7% and let the house carry the debt. On rate alone the equity route usually looks cheaper, and for buyers with substantial equity it can save several thousand dollars of interest over the life of the financing. That is why the question is so popular — and why the wrong answer is so common. The catch lives in three places. First, security: a car loan is secured by the car, so the worst case is losing the car; redraw against the mortgage means your home collateralises a vehicle that loses value the moment you drive it out of the yard. Second, discipline: car loans force a fixed payoff date, while mortgage redraws routinely linger for decades at the mortgage's balance, quietly compounding. Third, Australian tax rules: neither route is deductible for personal motoring — the ATO follows use of funds — so this comparison is a pure after-cost decision. This tool prices both routes side by side, checks whether enough borrowable equity exists at your lender's LVR ceiling, and shows the true interest gap so you can make the call with the risks on the table.
Two Amortising Loans on One Amount
The borrowed amount is identical in both scenarios — the car price minus your cash deposit. Each route then runs the standard amortising payment formula, Payment = P × r ÷ (1 − (1 + r)^−n), at its own interest rate: the home-equity (or redraw) rate for the equity route, and the secured car-loan rate for the car-loan route, both over the same term. Total interest for each is all payments minus the amount borrowed; the headline figure is the difference between them. Before pricing the equity route, the tool verifies feasibility against the combined LVR ceiling most lenders use: borrowable equity = (home value × max LVR) − mortgage balance. If that figure is smaller than the amount needed, the equity route is not on the table regardless of its rate. The tool also reports the combined LVR after drawing, since pushing above 80% can trigger lenders mortgage insurance and worse pricing — costs that would erase much of the interest saving. The comparison deliberately strips out tax, because personal car use makes either loan's interest non-deductible in Australia; if the vehicle were for business or investment use, an entirely different (and often larger) set of considerations would apply, including FBT and running-cost records.
Expert Insights
The Rate Gap Has to Beat the Risk Transfer
Funding a car through the house transfers risk from a depreciating asset to your most essential one. The right mental model is not 'which rate is lower' but 'is the interest saving worth making the car a liability of my home?'. A few hundred dollars of saving a year rarely justifies it; several thousand over the term might. As a rule of thumb experienced borrowers apply: use the equity route only for value-adding or essential purposes, and only when you will repay on the exact schedule a car loan would have imposed.
Low-Promo Dealer Finance Flips the Verdict
Manufacturer finance regularly undercuts equity rates — 3–5% promotional offers are common at model-year changeover, and a no-interest balloon or dealer cashback can make dealer finance cheaper than the mortgage route. This calculator shows the interest gap, not the total deal: always fold in dealer cashback offers with the Cash Back vs Low Interest tool, because a 'cheap' equity draw that beats a 9% rate can lose badly to a 3.9% promo. The winner is whichever route costs less all-in, not whichever sounds more sophisticated.
Match the Payoff Horizon to the Asset's Life
A car loan forces the debt to die with (or before) the car — typical terms of 4–7 years. Redraw against a 25-year mortgage, even at a lower rate, can silently extend a $40,000 car cost across a decade of extra mortgage interest if you do not deliberately repay it. The disciplined version: treat the redraw as a car loan in disguise — set a separate repayment amount, track the drawn balance monthly, and close it out by the date the car loan would have finished. Do that and the equity route genuinely wins; drift and it often doesn't.
Actionable Tips
- 1
Check Borrowable Equity Before Anything Else
The decision often makes itself: if your combined LVR is already near the 80% ceiling, there is nothing to redraw anyway. Enter your current home value (a realistic market figure, not the purchase price) and mortgage balance here first. If borrowable equity falls short of the car price less deposit, the comparison is academic and the car loan is your path — or revisit after more repayments or a higher valuation.
- 2
Get the Real Car-Loan Rate, Not the Brochure Rate
Car advertising shows headline rates that often exclude fees, balloon structures, and conditions. Ask the dealer or lender for the comparison rate — the single figure Australian lenders must disclose under NCCP rules — and use that number here. A 6.99% headline with a 30% balloon and fees can compare closer to 9%+. The accuracy of this whole decision rests on entering the true rate, so ten minutes clarifying the car quote saves thousands in a wrong call.
- 3
Write the Repayment Schedule Whichever Route Wins
Choose the cheaper route, then schedule repayments as if the other had won. Taking the car loan? Put the monthly interest saving from the lower equity rate into the car payoff and finish early. Taking equity? Treat the draw like a car loan: fixed amount, fixed date, separate tracking. The biggest losses in this comparison are behavioural — redraws that quietly become permanent mortgage extensions. A written date neutralises the risk either way.
Real-World Examples
The Lim Family Saved $4,100 and Kept Their Discipline
The Lims needed $40,000 for a family SUV. Their mortgage rate was 6.4% against a quoted 9.5% secured car loan over five years — the equity route saved about $4,100 in interest with combined LVR rising only to 66%. The key detail: they set their mortgage repayment $783 higher (the car loan's payment) and the redraw cleared in exactly five years. When the SUV's warranty expired, so did the debt. The strategy worked because they priced it as an interest arbitrage and managed it as a car loan.
Priya Nearly Missed the Promo Flip
Priya was ready to redraw $35,000 against her mortgage at 6.5%, but the dealer offered a 3.9% five-year promo during year-end clearance. Running this comparison showed the promo was cheaper by roughly $2,200 in interest — the equity 'bargain' rate was irrelevant against it. She took the dealer finance, kept her mortgage untouched, and her equity stayed available for its true purpose: an investment property deposit two years later. The lesson she repeats: compare against the real offer, not the usual one.
Ben's Redraw Lingered Six Extra Years
Ben redrew $30,000 for a ute at 6.8% against a 9.9% truck loan 'to save the interest'. Six years later the car had been sold and upgraded, but the redraw balance had barely moved — he had never set a repayment target, and the mortgage's flexible minimum swallowed the urgency. By his own reconstruction, the redraw ended up costing more in carried interest than the truck loan would have. He now tells people the equity route only works with a calendar: write the finish date on the day of the draw, or don't do it.
Glossary of Terms
- Redraw Facility
- A feature on most Australian variable home loans that lets you reborrow prepayments you have already made, usually at the mortgage's rate. It is the most common way Australians fund a car with home equity.
- Comparison Rate
- The single all-in annual cost of an Australian loan, legally required on advertising, folding the interest rate plus standard fees into one figure so borrowers can compare offers honestly.
- Combined LVR
- All borrowing secured against your home divided by its market value. Lenders typically cap this at 80% for equity access; the ceiling minus your mortgage balance defines how much you can redraw.
Frequently Asked Questions
Everything you need to know about this topic.
Ivy Sinclair-Wren
Financial Chaos Analyst
Ivy Sinclair-Wren is a Financial Chaos Analyst covering investing, AI, wealth psychology, and the emotional consequences of opening finance apps during market crashes. Based in Melbourne, she specializes in demystifying the Australian tax code and helping users navigate the intersection of spreadsheet logic and human irrationality.