Car Loans - Impact on Borrowing Capacity

Hi all

We are about to purchase a new vehicle. Hubby is an employee who receives a car allowance paid tax free as part of his package, as he is required to use his personal vehicle to attend various work locations, client meetings etc. We are thus able to claim tax deductions based on about 70-90% business use.

Ordinarily we take out a car loan with a balloon payment over about 4 years and then sell the vehicle at the end of 4 years and purchase the next one. The difference this time is the car allowance and associated work travel probably won't exist at the end of the next 4 year term, so we would need to pay out the balloon as we would retain the vehicle as a personal vehicle. So, based on a new vehicle purchase price of $60,000, we are considering whether it is smart to again do a 4 year car loan with a balloon payment that we would need to pay out, OR whether this time we should just do a simple 4 year car loan (or possibly 5 years to reduce the monthly repayment for cashflows sake) so that we own the vehicle free and clear at the end of the loan term.

Can anyone tell me if either of the car loan options (i.e. with or without a balloon payment) is more detrimental to our borrowing capacity when applying for a home loan (investment or owner occupied), which we will be doing again within about 12 months?

All feedback greatly appreciated. Thanks.
Angela

 

Hi Angela,

If you're purely interested in home loan impacts, car loans hurt quite a bit. For most lenders, the impact on your borrowing power is based of your repayment amount per month. The details of the car loan are often ignored. Therefore the higher the repayment, the bigger the impact is on your borrowing.

With this in mind, if you're seeking to purely maximise your borrowing power, your best to obtain: a bigger balloon & a longer loan term. Both mean a lower repayment amount, which help your borrowing power overall.

In general, car loans can be quite hefty in terms of their impact on your borrowing capacity. E.g. a $60k car with a $1k per month repayment, will have ~3x impact on borrowing power nowadays. I.e. an ~$180k impact. The exact amount varies, but its a decent enough 'quick calc' to factor in. The lower the repayment set up, the lower the impact.

 

Do you have enough equity to borrow against property?

 

Say someone has the equity....
Thoughts on having funds available to payout lease if/when required
But still proceed with lease to begin due to the pre-tax deductions

 

Lenders tend to base servicing calcs on the present position. You could also spend the $$$ on a holiday - Or more costly car.

eg Fred has a $15K credit card with no balance. He also has $15K in savings. Lender will assume the 3% monthly outgoing on the card of $450pm etc on the card as a outgoing despite no balance and may ignore the cash as anything but an asset.

 

I was going to suggest borrow against house, on a 30 year term, get lower rates and lower repayments and better servicing. Still claim a % of the interest.
Then pay out this loan when the car disposed of or no longer deductible.

 

Hi Redom.

Thanks for the great reply, much appreciated. Makes it clear that we'd be doing ourselves a disservice re borrowing capacity if we took out a simple car loan over 4 years due to the higher monthly repayments. A car loan with balloon payment it is and possibly with a 5 year term if our personal figures stack up. Thanks again!

 

Thanks everyone for the replies. Unfortunately using equity in property wasn't an option due to pending sale of the property likely within a shorter two year term. I appreciate everyone's feedback.

 

Car loans can be a killer to servicing. Probably not quite as bad as novated car leases though - they can really destroy it!

Agree with Redom above - it's all about the monthly repayment. So if you're looking to plan ahead - might be worthwhile getting an extended term but aim to pay it off quickly so you don't rack up a heap of interest.

Cheers

Jamie

 

@Redom @Jamie Moore

Novated being worse if payment amount is like for like?
$1000pm vs $1000pm for example?

I’m crossing this exact bridge in around 4 weeks time, would be interested to know which way is more suitable from a servicing point of view as well.


Example is I currently get suppled a fully maintained vehicle, nothing in my name, no lease or payment, drive it & give it back every 3yrs and company takes liability.. (would this actually add to servicing)

Now the company is giving me an option of an extra $20k a year allowance added to my gross income. So net approx $12,500 for the yr in my bracket.

Basically gives me $1020 a month to spend before I dig into my personal income, I could novate a $50k car, or take a loan out for about the same and would work out equal. However like for like, I’m not sure which one cuts me off more

 

A lot of people confuse general car loans vs novated lease. Keep in mind novated lease also includes your running cost which they belongs to your GLEE.

Whenever my clients have novated lease, I always include their monthly repayment in their GLEE rather than a seperate monthly loan expenses. Make enough notes to explain the difference in nature between car loan and novated lease you will be fine. I've done that many times and never have any issues from our credit managers

 

If I'm in your shoes and I'm about to take out a loan soon. I will probably take the extra 20k/pa to increase your Serviceability. At least you get to control what car and lease terms that suits you.

 

You can have a novated lease that is does not include running costs.

 

Which banks? I've seen this be done ONLY when the running costs are broken down, which you can get from the lease company. But it's only the running costs, NOT the full repayment.

 

You can attach their contracts to show what's included. Normally it include major expenses such as petrol and servicing etc. And becuase the nature is not a personal loan. You can pump up their travel related living expense to cater for the loan repayment as well. Since you don't really have a diminishing value like a normal personal loan.

 

Yes that's exactly what I stated in regard to the petrol servicing...

But you're also saying you increase the living expenses to include the actual repayment. I've never seen this used or accepted before, which bank do are you getting this accepted with?

Lease also has a diminishing value, that's why most have a balloon/payout figure at the end.

 

The way I put it to the credit managers is that at the end of the lease the customer can either payout the balloon and keep the car, or simply renew the lease and get a new car. Technically a leased car doesn't really belongs to the customer hence it is classed "leased". As I am unable to determine the excat loan size given the repayment has running cost built into it.
Hence my reason of include the entire repayment in GLEE rather than seperate loan repayment. This way is fairer for the customer.

I'm a NAB lender so I've only ever done this with NAB lol. We also get reviewed and audited pretty intensely and I never get picked up on this so I assume it is accepted? And like I said before, detailed credit notes is key.

 

Thanks for sharing, good to know. Good to hear you're getting it over the line w/ NAB.
Won't fly w/ CBA. Whilst you say you can't determine the exact loan, you actually can if you request documents from lease company, they can actually provide breakdown.
That's why I can do similar, but only splitting the repayments with running costs in living expenses and the remaining as a liabilities.
Without doubt gets you over the line, happy days. Even better if it's your credit team signing off on it.