Using home equity to fund a caravan: Is it a good idea?

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If you’re new to caravanning and thinking of financing it through your home equity, stop! Read our post on why a traditional loan could save you a lot more.

Using home equity to fund a caravan: Is it a good idea?
Buying a caravan using your home equity is the easy way of going about caravan finance

Equity, mate – it's a tempting prospect to use your existing home equity to invest in property both big and small. A caravan is sort of like buying a travelling hotel that you can own outright. In the long run, you and your family have unforgettable experiences on the open road without the constraints (and costs!) of staying in hotels or motels. Many people are frightened by the prospect of taking on another loan, additional to a mortgage or even a car loan. So wannabe caravanners look to financing a caravan using their home equity.

Buying a caravan using your home equity is the easy way of going about caravan finance. If you have a redraw facility set up you draw the amount, transfer the funds and before you know it, you're a caravan owner! There are no credit checks, extra repayments on top of your current mortgage repayment or hoping you'll be approved.

However, the big drawback is the long-term cost. Drawing from equity is almost always more costlier than taking out a new and separate caravan loan. Bill Tsouvalas, managing director of Savvy Caravan Loans explains all the reasons why:

Your interest rate is "lower" compared to your home loan

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But your home loan rate is at least 5 or 6 full basis points than even the most competitive caravan loan, you say? Let's break it down - a home mortgage term will extend beyond the usual 5 years for a caravan loan. The repayments on the total interest (on top of the principal) will always exceed the interest paid on your caravan loan. Even if your caravan loan offers a 9% comparison rate, you will pay LESS interest on it compared to taking it out of your home equity.

You won't know how much you owe

Since you redraw from your home loan, you won't know how much is owing on your caravan. The mortgage and your caravan loan is lumped into one sum which makes accounting for your debts harder.

No bargaining floor

Even though a lender or broker could impose a limit on how much you can spend on a caravan, this is actually a good thing. Imposing a price floor on your caravan, this puts you in a greater bargaining position. Dealers and private sellers will have to meet your hard and fast pre-approval amount instead of just drawing more (for more cost!) on your home loan.

Comparison rates mean all the fees are included

Comparison rates are interest rates with most fees included as part of the rate. Your bank or lender may impose redraw fees and minimum redraw amounts, which only means you'll spend even more when you don't need to.

So if you're thinking of using your home equity to finance a caravan, it's worth thinking twice!