Why the Low Rate Can Be Misleading
A mortgage rate of 4% to 5% looks much better than a car finance rate of 7% to 10%. But mortgage terms are typically 20 to 30 years, while car finance is usually three to five years. Spreading a car purchase over your entire mortgage term means paying interest for decades on an asset that loses value rapidly.
For example, borrowing £15,000 for a car on a 25-year mortgage at 5% would cost around £11,300 in total interest. The same amount on a four-year personal loan at 8% would cost roughly £2,600 in interest. Despite the higher rate, the personal loan is less than a quarter of the total cost.
Comparing Your Options
Here are the main ways to finance a car, each with different pros and cons:
- PCP (Personal Contract Purchase) — low monthly payments with a balloon payment at the end. You don't own the car until the final payment.
- HP (Hire Purchase) — fixed monthly payments, you own the car at the end. Rates are typically 5% to 10%.
- Personal loan — borrow a lump sum and buy the car outright. Rates from 3% to 8% depending on your credit score.
- Remortgage — lowest rate but longest repayment period, and your home is at risk.
For most people, a competitive personal loan or HP deal will be the most cost-effective option when you factor in total interest paid.
When Remortgaging Could Work
There are limited circumstances where remortgaging for a car makes sense. If you're already remortgaging for another reason (such as your deal is ending) and you need a car, adding a small amount to your new mortgage keeps things simple. If you commit to overpaying the extra amount within three to four years, the total cost comes closer to a personal loan.
It can also help if you have a poor credit score and can't access affordable car finance. Mortgage lenders focus on your overall financial profile and property equity rather than just your credit score, so you may get a better deal through remortgaging than through specialist car finance aimed at borrowers with lower credit scores.
The Risk Factor
The fundamental issue with remortgaging for a car is that you're securing a depreciating asset against your home. A new car can lose 40% to 60% of its value within three years. If something goes wrong financially, your home is at risk over a purchase that's worth a fraction of what you borrowed.
With a personal loan or car finance, the worst-case scenario if you can't pay is damage to your credit score and potential repossession of the vehicle. With a mortgage, the worst case is losing your home. This risk should weigh heavily in your decision.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.