PCP income to loan ratio?

Petriix

We're looking at options for buying a new EV. We've got loads of equity but fairly low income. Because our mortgage payments are really low we've got quite a bit of disposable income and we are willing to spend a fair chunk on going electric.

Is there a golden rule for income to loan ratio for buying a vehicle, similar to how mortgage lenders will lend up to 4 x salary?

We're looking to finance around £19k (at £275 per month) on a combined income of around £26k.

We are also looking at borrowing the money on the mortgage, but would prefer PCP if possible.

I'm not looking for advice about the merits of buying an expensive car, but would welcome any insight into the way affordability is assessed for car finance.

DrEskimo

The finance is not going to be joint, so the combined income doesn't really factor. What is the income of the person looking to take the finance?

In general, I don't know of any specific multiples, but if your income is around the same as the amount you are trying to borrow I suspect you will have difficulty.

PCP being secured on the car will make it potentially easier to borrow, but I imagine income will still play a big role.

I would strongly advise against borrowing it against the house...you dont want to be borrowing high cost depreciating assets secured on the home.

DCFC79

How much is the disposable income ?

penners324

When I bought my car I increased my mortgage. Mortgage payment still very affordable and a brand new car. And borrowing at 1.7% not 5% offered by the car finance companies 

DrEskimo

penners324 said:

When I bought my car I increased my mortgage. Mortgage payment still very affordable and a brand new car. And borrowing at 1.7% not 5% offered by the car finance companies 

Depends how long your mortgage is, or whether you will be overpaying the mortgage to clear the additional borrowing sooner?

No sense in taking the lower APR over 15-20yrs...it's going to cost you far more in interest than a 5% loan over 3yrs.

Petriix

DrEskimo said:

penners324 said:

When I bought my car I increased my mortgage. Mortgage payment still very affordable and a brand new car. And borrowing at 1.7% not 5% offered by the car finance companies 

Depends how long your mortgage is, or whether you will be overpaying the mortgage to clear the additional borrowing sooner?

No sense in taking the lower APR over 15-20yrs...it's going to cost you far more in interest than a 5% loan over 3yrs.

I see this argument a lot. If you directly compare the cost of the finance to the cost of the mortgage then the mortgage wins every time. If you overpay on the mortgage to match what the finance payments would have been then you ultimately pay less interest.

The crunch is that our current mortgage is £180 per month, 26 years remaining. The additional £19k would cost £77 per month over the same term. At £267 per month (which is the overpayment limit) it would be paid off in under 7 years at a total interest cost of £1138. The interest on the PCP totals £3250 over 4 years, then you have to find the balloon payment of £9k.

DCFC79 said:

How much is the disposable income ?

We currently overpay our existing mortgage by £350 per month, so we could divert that towards the car. We would also save ~ £60 per month on fuel.

DrEskimo

Petriix said:

DrEskimo said:

penners324 said:

When I bought my car I increased my mortgage. Mortgage payment still very affordable and a brand new car. And borrowing at 1.7% not 5% offered by the car finance companies 

Depends how long your mortgage is, or whether you will be overpaying the mortgage to clear the additional borrowing sooner?

No sense in taking the lower APR over 15-20yrs...it's going to cost you far more in interest than a 5% loan over 3yrs.

I see this argument a lot. If you directly compare the cost of the finance to the cost of the mortgage then the mortgage wins every time. If you overpay on the mortgage to match what the finance payments would have been then you ultimately pay less interest.

The crunch is that our current mortgage is £180 per month, 26 years remaining. The additional £19k would cost £77 per month over the same term. At £267 per month (which is the overpayment limit) it would be paid off in under 7 years at a total interest cost of £1138. The interest on the PCP totals £3250 over 4 years, then you have to find the balloon payment of £9k.

DCFC79 said:

How much is the disposable income ?

We currently overpay our existing mortgage by £350 per month, so we could divert that towards the car. We would also save ~ £60 per month on fuel.

Yea I agree. I nearly always look at actual cost. APR will only tell you so much. Particularly if you are comparing different loans, like PCP with personal loan. The term, repayment structure and APR all need to be factored in.

Of course the other side is financial risk. Any borrowing comes with it financial risk. If you secure the finance on the car, then if the worst happens you have the car taken away. If you secure the additional borrowing on the house, and can't afford the increased mortgage payments, then you are putting your house at risk.

You could try for unsecured loan, but you're very unlikely to be able to borrow the amount you are after, particularly at a low APR. Then of course if would have be paid off quicker to offset the higher interest, which doesn't sound like it will be affordable.

Which probably brings me to my own personal conclusion....you need to look at a cheaper car or keep saving....

Out of interest what car is it, and how much have you saved to go towards the purchase?

Petriix

DrEskimo said:

Out of interest what car is it, and how much have you saved to go towards the purchase?

It's an MG5 EV. We've saved around £6k but we're expecting a £4k insurance payout in the next few months and a couple of Help to Save accounts which will pay out £6k in 18 months. MG are also offering £4k off for trading in our banger making the total purchase price around £23k.

We would want to keep a £2k buffer but we can very comfortably account for the entire cost of the finance over the 4 years and would likely settle it early. We've built up an overpayment reserve of over £10k on our current mortgage so would look to re-borrow that if nothing else.

DrEskimo

Petriix said:

DrEskimo said:

Out of interest what car is it, and how much have you saved to go towards the purchase?

It's an MG5 EV. We've saved around £6k but we're expecting a £4k insurance payout in the next few months and a couple of Help to Save accounts which will pay out £6k in 18 months. MG are also offering £4k off for trading in our banger making the total purchase price around £23k.

We would want to keep a £2k buffer but we can very comfortably account for the entire cost of the finance over the 4 years and would likely settle it early. We've built up an overpayment reserve of over £10k on our current mortgage so would look to re-borrow that if nothing else.

Is the MG5 model really £27k? I know the ZS-EV Exclusive model can be had brand new for £21,990?

Petriix

DrEskimo said:

Petriix said:

DrEskimo said:

Out of interest what car is it, and how much have you saved to go towards the purchase?

It's an MG5 EV. We've saved around £6k but we're expecting a £4k insurance payout in the next few months and a couple of Help to Save accounts which will pay out £6k in 18 months. MG are also offering £4k off for trading in our banger making the total purchase price around £23k.

We would want to keep a £2k buffer but we can very comfortably account for the entire cost of the finance over the 4 years and would likely settle it early. We've built up an overpayment reserve of over £10k on our current mortgage so would look to re-borrow that if nothing else.

Is the MG5 model really £27k? I know the ZS-EV Exclusive model can be had brand new for £21,990?

Yes, the MG5 has a bigger battery. We need the roof rails so have to go for the 'exclusive'. We're effectively getting the paint for free. I've done a fair bit of shopping around and that's the best price I can find.

Petriix

Thanks for the input. We skipped the finance and have a DIP for the additional mortgage. Fingers crossed Nationwide won't take forever to put it all through.