When we first purchase a home we breathe a sigh of relief. After a while though (and perhaps a pay rise or two later) we start thinking about our second largest asset. Ours car.
Before I get onto cars, let’s briefly delve into a few facts that may or may not apply to you. Firstly, we rarely stay in our first house for very long, if we do, we generally renovate it to suit our growing family requirements. How do we do this? Most of us go back to the bank and borrow.
When you purchase a shiny new car, you will feel good about it and it may be a requirement that you and your family cannot do without. However, bear this in mind. If you decide to lease your car (and many people do), every $1,000 per month in lease repayments is reducing your borrowing capacity by $200,000.
Credit card limits also reduce your borrowing capacity – as the banks assume that you will be drawing down the full amount and paying back only 5% of the outstandings.
Why is this so?
Firstly, a car is a depreciating asset. Say you pay $50,000 for a car and place it on a 3 year lease. You will have a residual (and I’m using round numbers here) of around $20,000. Which means you will be paying off $30,000 in 3 years for no value (or near enough that it makes no difference). More importantly, you’re using short term debt to finance a short term asset – which means the amount of repayments are relatively greater compared to the value being financed.
I’m not saying you shouldn’t lease a car. What I’m advising is that before you do, speak with your finance broker to see how this will affect your future borrowing capacity. Then, if you still want to lease that car at least you’re well informed and may be able to time it so that your car lease matures when you need to increase your home loan. Your finance broker will also be able to help you with that car lease.