What is the Residual Value on My Novated Lease?
When taking out a car loan through a novated lease, one of the factors you need to consider is the residual value.
A residual value is a lump sum payment that falls due at the end of your novated lease. The minimum amount of this payment is determined by the ATO, as a percentage of the amount that you borrow to purchase a car.
Here are the ATO recommended residual values for a novated lease from 12 months to 60 months:
|Term Of Lease||Minimum Residual Value|
* current, effective from 1 July 2002. These rates apply to cars, but not to plant and equipment. The effective life of a car is determined to be eight years.
When your loan term ends, your contract will contain a term that requires you to pay the remaining loan balance or 'residual value'.
You can do this either with a cash payment, or by refinancing the residual value.
Find out more about how you can get a novated lease here.
How much will my residual value be?
Here's some examples of residual values for some common car buying situations:
|Amount Borrowed||Novated Lease Term||Residual Value|
As you can see, taking out a longer loan term means a smaller residual value.
You need to remember that you do pay interest on the residual value during the novated lease too.
Why choose a novated lease?
Having such a large payment due at the end of your loan term seems like a disadvantage, and might put you off choosing a novated lease over a secured car loan.
Three reasons that PAYG employees may choose a novated lease are:
- Access to very low interest rates
- Low repayments
- Tax savings mean more money in your pocket right now.
Why is the residual value so large?
The balloon payment due at the end of your novated lease offsets the principle, reducing your car loan payments during the term of the lease.
You can reduce the balloon payment that you'll owe at the end of your lease by providing a large deposit towards the purchase of your car.
You can also reduce your total residual value payment by taking out a longer lease, but there's two things you need to remember:
- A novated lease is an arrangement that involves your employer, so you want the length of the lease to reflect your future employment intentions.
- Remember to allow for the unexpected, or the opportunity to follow a new career path.
- You'll pay interest on the residual value, so the longer the loan term, the more interest you'll pay.
I'm a PAYG employee, what should I do?
First, you should get financial advice from your accountant. They will be able to work out whether, once you take into account GST savings, tax reduction using salary sacrifice and Fringe Benefits Tax that you now need to pay, whether you'll be better off.
If you do take out a novated lease, treat the residual value as part of your car loan, and plan to save this amount with the extra money you have coming in. You'll get the best deal when you:
- Take the shortest loan term possible
- Save your residual value amount during the loan term.
- Pay out your novated lease contract at the end of the loan term.
With this strategy, you'll take maximum advantage of tax savings as well as low novated leasing interest rates to own your car sooner.
What if I can't pay my balloon or residual value?
If you don't manage to save the balloon payment during the loan term, you have the option to refinance this amount to a secured car loan.
The ATO minimum residual value guidelines are designed so that at the end of the novated lease, you'll have equity in your car - it will be worth more than the remaining balance of your car loan.
This means that you will be able to refinance to a secured car loan and pay off the rest of the residual at a reasonable interest rate.
You also have the option to trade in your car to pay out the remaining balance of the loan.
If you are currently near the end of your novated lease, or you're thinking about novated leasing as an option to purchase your next car, a lending specialist can answer any questions that you have specific to your financial situation, and match you to the car loan that will give you the best financial outcome.