Interest rates are up again, and with the cost of living also on the rise, that shiny new car you had planned to buy on finance may be a problem…
Before we go any further, we want to make it clear that the following doesn’t constitute financial advice, and is simply a comment on the current market conditions. If you need to make a financial decision, please speak to your financial planner. Talk to us about cars.
What is the current interest rate (cash rate) in Australia?
As of 2 August 2022, the official cash rate set by the RBA (Reserve Bank of Australia) is 1.85 per cent, a rise of 0.5 per cent on July, and an increase of 1.75 per cent on the all-time low point of 0.1 per cent between November 2020 and May 2022.
What has this got to do with cars?
Plenty. In 2017, 90 per cent of all car purchases were arranged using some form of finance.
If the RBA increases the cash rate, then all other interest rates follow suit. That means your home loan, personal loan and car loan are all impacted. Even your credit card rate may increase, so keep that in mind when you fuel up next.
It’s only a small change, why is this such a big deal?
If you currently have a car on finance and are comfortably managing your monthly repayments as well as your mortgage and other living expenses, then a rate change shouldn’t mean the end of the world, assuming your earning potential hasn’t decreased.
Everyone’s circumstances are different though, so do consult your financial planner if you feel an increase in your monthly repayments may be challenging.
However, the real issue is not for people who currently have finance, but for those seeking to borrow for a new purchase.
I’ve been waiting for my new car to arrive, what does this mean?
When your new car arrives (or even your new-to-you car), and you want to complete the purchase on finance, not only will your repayments be higher than they were a few months ago, but the lender will reassess your ability to repay based on the new data, which includes not only a higher base rate but also a trend of rates increasing.
In addition to any interest rate rise since you joined the waiting list, lenders add a couple of percentage points when assessing a buyer’s ability to pay if interest rates continue to rise.
In other words, the lender will ‘assume’ the rate rises will continue and assess your income against increased repayments for your home loan, cost of living and car loan.
For some buyers, this will mean your monthly outgoings will have risen enough to tip the bank’s evaluation of you from “approved” to “declined”.
Are there other options? What if the dealer offers me finance?
There are always alternatives when it comes to car finance.
Again, we aren’t here to provide financial advice, so check with your financial planner or even the finance lender to ensure everything is in order before you get to the showroom.
Dealer finance, personal finance, leases and chattel mortgages are all products on the table, and they all operate in different ways for each customer.
What if I draw down on my mortgage to buy a new car?
If you have overpaid your mortgage to get ahead or have money sitting in an offset account, then using those funds to buy your next car is a good idea – as long as you can still meet your home loan repayments.
Home loans typically attract a much lower interest rate than personal loans which means you’ll repay less over the long term. But it’s worth remembering that you’re still adding more debt which means you need to be able to continue servicing the loan.
It’s also worth doing your sums on a higher interest rate than today’s market rate of 3.9 per cent, because everybody from financial journalists to the finance industry to the bloke at the corner store is expecting interest rates to continue rising for the rest of this year and the next.
I have cash under the mattress, is this the ‘rainy day’ we’ve been waiting for?
In a fluctuating finance market, cash is always king.
If you are looking to secure a new car and want the least amount of volatility or stress, then paying ‘real money’ is great. You’re in the minority though!
What happens if I can’t get finance?
Most new car contracts are ‘subject to finance’ so if things don’t work out based on the new lending criteria, you should be able to walk away. Whether you can retrieve your deposit depends on the dealer and the arrangement in place.
I’m looking at a second-hand car, is this still a problem?
Yes, and perhaps more so.
Many second-hand cars are asking prices much higher than traditional depreciation can account for, meaning you are paying ‘over the odds’ for a car that already has a defined price. If the market changes at all and second-hand prices reduce somewhat, you may find you owe more in finance than what your car will ever be worth, and that’s a terrible position to be in.
This unenviable situation is often known as ‘Loan prison’ because even selling the car will not give you enough money to repay the loan.
You mentioned an upside – what is it?
The increasing difficulty in obtaining finance will mean some buyers cannot take delivery of their new cars. This may open up opportunities for other buyers further down the waiting list (or not yet on it) to get into a car earlier than expected.
Especially if you have cash ready to go.
Obviously, this may mean you need to be flexible with specifications, but it could beneficial to contact your local dealer now, especially if you have an order in the queue.
Does this mean cars will get cheaper or more expensive?
Global inflation and the rising cost of material supply and vehicle production has shifted nearly all new car prices upward, where a lack of supply of new stock combined with increased consumer demand has pushed second-hand prices up too.
While we don’t see new car prices changing favourably any time soon, we think the second-hand market may have reached its peak, with buyers perhaps reconsidering a purchase until things settle somewhat, which when combined with more new stock arriving all the time may cause second-hand prices to normalise somewhat.
A reminder, none of this should be taken as financial advice, and if you feel you need to speak to someone before making a large financial decision (like buying a car), please speak to your lender or financial advisor.