Understanding Different Types of Car Finance
Before considering whether to remortgage to pay off your car finance, it is essential to understand the type of agreement you have, as each works differently and has different implications for consolidation.
Hire Purchase (HP)
With hire purchase, you pay a deposit followed by fixed monthly payments over a set period, typically three to five years. You do not own the car until the final payment is made. HP agreements can usually be settled early and are one of the most straightforward types of car finance to consolidate into a mortgage. The interest rates on HP agreements typically range from 5% to 15%, depending on your credit profile and the dealer.
Personal Contract Purchase (PCP)
PCP is the most popular form of car finance in the UK. You pay a deposit and lower monthly payments than HP, but at the end of the agreement you must either make a large balloon payment to own the car, hand it back, or use any equity as a deposit on a new vehicle. Consolidating a PCP agreement is more complex because you are not simply paying off a reducing balance. If you want to keep the car, you would need to settle the total amount outstanding, including the balloon payment.
Personal loan for a car
If you used a personal loan from a bank or building society to buy your car, this works the same as any other unsecured personal loan. You own the car from the start and the loan is not secured against the vehicle. This type of car finance is the simplest to consolidate into a mortgage.
Personal Contract Hire (PCH)
Personal contract hire is essentially a long-term rental agreement. You never own the car and return it at the end of the term. Because there is no outstanding balance to settle, PCH cannot be consolidated into a mortgage. You are simply paying for the use of the vehicle, not paying off a debt.
Conditional sale agreement
Similar to hire purchase, a conditional sale agreement involves fixed monthly payments and you own the car once all payments are made. The key difference is that with a conditional sale, you commit to buying the car from the outset. These agreements can typically be settled early and consolidated into a mortgage.
It is important to obtain an accurate settlement figure from your finance provider before proceeding. The settlement figure may differ from the total of your remaining payments because it accounts for any interest that would have been charged but will not now apply. Under FCA regulations, you have the right to settle most consumer finance agreements early.
How Remortgaging to Pay Off Car Finance Works
The mechanics of remortgaging to clear car finance are similar to any debt consolidation remortgage. You borrow additional money against your property's value and use those funds to settle your car finance agreement. Here is a detailed look at how the process works in practice.
Obtaining your settlement figure
Contact your car finance provider and ask for a settlement figure. This is the amount you would need to pay to clear the agreement in full. Settlement figures are typically valid for 28 days, after which they may need to be recalculated. For HP and conditional sale agreements, this is usually the remaining capital plus any interest accrued to the settlement date, minus a rebate for interest that will not now be charged.
Assessing the viability
Your mortgage adviser will compare your current monthly costs (mortgage plus car finance) with the proposed consolidated mortgage payment. They will also compare the total cost over the life of each arrangement to ensure consolidation is genuinely beneficial rather than simply moving the problem.
Application and approval
The mortgage application will specify that part of the capital being raised is for settling car finance. The lender will assess your affordability taking into account that your car finance payment will cease on completion. They will verify your income, review your credit history, and value your property.
Settling the car finance
On completion of the remortgage, the settlement amount is paid to your car finance provider. Depending on the lender and the type of finance, this may be paid directly by the lender or your solicitor, or the funds may be released to you with the expectation that you settle the finance promptly. Once settled, any charge on the vehicle (in the case of HP or conditional sale) is removed and you own the car outright.
A practical example
Consider a homeowner with a property worth 280,000 pounds, an existing mortgage of 160,000 pounds, and car finance with a settlement figure of 12,000 pounds. Their new mortgage would be 172,000 pounds, giving an LTV of just over 61%. If their current car finance payment is 350 pounds per month at 9% APR and the additional mortgage borrowing costs 65 pounds per month at 5% over the remaining mortgage term, the monthly saving is 285 pounds. However, the total interest on the car finance over the mortgage term would be considerably higher than if the car finance were paid off over its original three-year period.
Pros and Cons of Paying Off Car Finance Through Your Mortgage
Deciding whether to consolidate your car finance into your mortgage requires careful consideration of both the advantages and the potential downsides.
Advantages
- Reduced monthly payments — The most immediate benefit is a lower monthly outgoing. Car finance rates are typically higher than mortgage rates, and spreading the balance over a longer term reduces the monthly cost substantially.
- Simplified finances — One mortgage payment is easier to manage than separate mortgage and car finance payments. This reduces the risk of missed payments and makes budgeting more straightforward.
- Improved monthly cash flow — The reduction in monthly payments frees up income for other priorities, whether that is building savings, covering household expenses, or investing in other areas.
- Car ownership — If you are on HP or a conditional sale agreement, settling the finance means you own the car outright. You are free to sell it, modify it, or keep it without any restrictions from the finance company.
- No more negative equity risk — With PCP and HP, if your car depreciates faster than you are paying off the finance, you could end up in negative equity. Settling the finance eliminates this risk.
Disadvantages
- Higher total cost — This is the most significant drawback. A 12,000 pound car finance balance paid over three years at 9% costs approximately 1,750 pounds in interest. The same amount over 20 years at 5% on your mortgage costs approximately 7,200 pounds in interest. You pay substantially more overall.
- Depreciating asset on a long-term loan — Cars lose value over time. By the time your mortgage term ends, the car will have been replaced several times, yet you will still be paying for it through your mortgage. This is fundamentally different from using your mortgage for an appreciating asset like home improvements.
- Secured against your home — Car finance, whether HP or personal loan, does not put your home at risk. Once consolidated into your mortgage, failure to keep up payments could ultimately lead to repossession of your home, not just the car.
- Loss of voluntary termination rights — Under the Consumer Credit Act, you have the right to voluntarily terminate an HP or PCP agreement once you have paid 50% of the total amount payable. If you consolidate the finance into your mortgage, you lose this protection.
- Potential impact on future car purchases — If you consolidate your car finance and then need to replace the vehicle in a few years, you could end up with both the old car's costs on your mortgage and a new finance agreement, doubling up your commitments.
Weighing these factors carefully and discussing them with a qualified adviser will help you make a decision that truly serves your best interests in both the short and long term.
