Novated Lease or Buy Outright?

Hi All,
I know this is a property forum but given I spend so much time on here I thought I would ask some of the finance gurus.
In October my novated lease through my PAYG employment expires and I am unsure whether or not to do it again. To be honest I am unsure of the benefits I even received doing this? It just seemed really convenient.

I have the money to purchase a vehicle outright but I am unsure if that is the best option. I am well aware of how novated leases affect serviceability but this is not a real issue for me at the moment as I am only holding my PPOR and likely only 1 additional property at years end that i will EVENTUALLY develop.

Just some basic figures/assumptions:
- Looking to spend 35k (If leased would buy from a dealer for GST discount).
- Average around 15,000 km's per year
- Want a vehicle that will last 5 years
- Current home interest rate is 4.58% (So if i purchased outright this amount would be reduced from offset account).
- Both wife and I have small businesses that require travel but for the most part the 15,000km's are personal use.

So from a financial stand point am I better of leasing again? Or should i just purchase the vehicle outright?
 
Owning outright may mean that there is no salary sacrifice and hence zero deduction. You would receive higher income (taxed) and have zip to deduct. But at least you own it. Packaged cars are a item you pay a lot for but never own.

What would the eligible business use for the car be if you owned it outright ?? (Exclude travel between home/work or return)

A employed SS car package on the other hand satisfies other concessions for determining the private use and while FBT is payable the higher costs can be taken from before tax income meaning tax savings bring cost down.

Your employer FBT packaging company should be able to provide a example of the two scenario's relevant to your marginal tax rate and vehicle type / use etc.
 
A novated lease brings you various tax benefits. As Paul has indicated those providing the lease should be able to make a convincing argument to the financial benefits.

From a finance view, they're a disaster, even a regular car loan is better from a serviceability perspective.

In general terms, a novated lease is a tax effective way to cover the cost of car ownership as well as operation (maintenance & fuel). When assessing affordability, lenders include minimum figures for living expenses as a liability. There is no separate allowance for transport costs, it's bundled into the living expenses figure.

With a novated lease, many transport costs become a separate liability as the lease payment. Unfortunately lenders don't reduce their minimum living expenses figure so now there's two entries on the liabilities page covering the same costs for transport. Effective the lenders double dip some of your outgoing expenses. This has a significant effect on people's affordability.

Outside of this, a novated lease is probably going to be more cost effective. If you're not planning to borrow more money then it becomes simply a question of looking at the cost of the lease.

If you do intend to borrow more in the future, get a quote for the novated lease and discuss it with a broker. It shouldn't be too difficult to get a rough idea of your affordability with or without the lease. From there you can better assess which path best meets your goals.
 
Thanks Paul and Peter

Peter - Yeah I know about the affect on killing serviceability. It would be good if lenders could adjust for this though. In my current situation this is not an issue as stated I only have one property and earn a good income so could easily service my next development site.

Paul - Thanks, I will see what the packaging company "Selectus" can do in terms of comparison. My only concern was anything they put together could be manipulated in such a way to make it appear the novated lease is a no brainer.
 
Thanks Paul and Peter

Peter - Yeah I know about the affect on killing serviceability. It would be good if lenders could adjust for this though. In my current situation this is not an issue as stated I only have one property and earn a good income so could easily service my next development site.

Paul - Thanks, I will see what the packaging company "Selectus" can do in terms of comparison. My only concern was anything they put together could be manipulated in such a way to make it appear the novated lease is a no brainer.

Its likely it will look that way. Most employees cant deduct any car use. The irony is under SalSac the employer can use methods that alter the outcome.

That said in the last budget private car owners lost two methods used to claim car costs. I forsee a future budget when employers are told its either 100% FBT or a logbook.

On the finance issue the novated lease thing is waved in employees faces like its a huge benefit. It is...To the employer who manages to shift the finance obligation and 5 years of debt and finance obligations off their balance sheet and onto yours. It can really harm serviceability and in the present environment the banks are looking for excuses.
 
I have attached the excel working to compare Novated lease Vs paying from an investment loan when I was faced with the same question.
Excel File

It looks like, for a person who is on 38c tax rate bracket and does less than 15Kms, no benefit on a fortnightly basis but there is a benefit at the end of three year lease.

You can change the values in cyan background to suit your own situation.

Let me know if anyone needs any clarifications. Also please let me know if I made any mistake.

* I claim no responsibility if you make a decision based on this *.

I would say it comes down to your limiting factor in investing. If you are short of deposit then Novated lease isn't a bad idea. You are saving on the GST as well.
If your serviceability is the limiting factor then don't bother as brokers here said.
 
keep in mind that IR charged on novated lease is at least 9%. Eg in your case interest payment is at least $3,150 for first year.
 
The modelling i did about 3 years ago indicates if you have a choice between buying a car using the funds from your home loan (separate equity loan), then using your home equity loan is cheaper marginally.

Because even though you get the benefits of paying with pretax using a novated lease, the interest rates they charged and admin fees applied, it wasn't worthwhile.

But novated lease vs personal loan, then definitely novated lease.
 
I have attached the excel working to compare Novated lease Vs paying from an investment loan when I was faced with the same question.
Excel File

It looks like, for a person who is on 38c tax rate bracket and does less than 15Kms, no benefit on a fortnightly basis but there is a benefit at the end of three year lease.

You can change the values in cyan background to suit your own situation.

Let me know if anyone needs any clarifications. Also please let me know if I made any mistake.


* I claim no responsibility if you make a decision based on this *.

I would say it comes down to your limiting factor in investing. If you are short of deposit then Novated lease isn't a bad idea. You are saving on the GST as well.
If your serviceability is the limiting factor then don't bother as brokers here said.

Question: on the table you showed at the end of the 3 yrs, lease is about 9k better off, but you will need to pay the car out? (Residual of 15750?)

Whereas normal car loan you don't?

Anyway I m leasing my car and on a car loan (for wife) I find leasing is a rip, never do it again. ( mayb I just don't understand enough)
 
A lot of the times my packaging company also include a $500-$1000 Coles Voucher to sweeten the deal. Do you think this is just a gimmick and they would include this in their leased figure amount?

To be honest, I am none the wiser even with all these great replies.
I do get the feeling buying outright is a better option but I also need to consider opportunity cost, as 35k could be used for the deposit on an IP.
 
I just used the Selectus calculator on a $35,000 4WD doing 15,000kms per year and it said the weekly lease cost would be $236!

That sounds ridiculous high compared to if I purchased the vehicle outright! My current interest rate is 4.58% so that is $30 a week if sitting in my offset. then include say:
Petrol = $60
Insurance = $15
Rego = $15
Servicing = $15
Total Cost = $135

I know this is very basic and no doubt I am missing something but it appears I would be $100 a week better off if I just purchased the vehicle outright?
 
A lot of the times my packaging company also include a $500-$1000 Coles Voucher to sweeten the deal. Do you think this is just a gimmick and they would include this in their leased figure amount?

To be honest, I am none the wiser even with all these great replies.
I do get the feeling buying outright is a better option but I also need to consider opportunity cost, as 35k could be used for the deposit on an IP.

Fleet leasing companies get significant fleet discounts which are hidden from all parties. This explains why for example Mazda don't generally do fleet deals (Or Hyundai...Many others). Yes you can do a Mazda on fleet BUT there is no factory fleet support (kickbacks) making it comparatively expensive.

I suspect the fleet discount will get smashed when the local car industry closes and there is a level field. And without a local car manufacturing industry the Fed Govt has no reason to keep FBT concessions.

Fleet companies earn a nice margin from the extortionate loan rate and mark ups used in packaged calcs. They then obtain bulk discounts like 40% off tyres at their suppliers yet charge the customer full whack.
 
I just used the Selectus calculator on a $35,000 4WD doing 15,000kms per year and it said the weekly lease cost would be $236!

That sounds ridiculous high compared to if I purchased the vehicle outright! My current interest rate is 4.58% so that is $30 a week if sitting in my offset. then include say:
Petrol = $60
Insurance = $15
Rego = $15
Servicing = $15
Total Cost = $135

I know this is very basic and no doubt I am missing something but it appears I would be $100 a week better off if I just purchased the vehicle outright?
Wouldn't the lease include some 'repayment' of the principal? That would explain 2/3s of the extra $100 very roughly.
 
Wouldn't the lease include some 'repayment' of the principal? That would explain 2/3s of the extra $100 very roughly.

Knew I was missing something important.
I believe my current novated lease has a balloon payment of 40% so perhaps the calculator would use that as a figure.
 
Knew I was missing something important.
I believe my current novated lease has a balloon payment of 40% so perhaps the calculator would use that as a figure.

I'd guess that it does. My calcs were a flatline 'repayment' of principal (ie didn't allow for less interest as the loan get's repaid and more of each payment is paying principal rather than interest) but on a 50% balloon on a five year period.
 
My $25k novated leased vehicle cost me $1000 a month for five years, therefore I paid $60k plus residual $9k for a $25k vehicle over five years. Even a personal loan would have been far better off imo, never again.
 
I have tried working out which is better and it is not easy as so many variables. I think the best if you have some cash is to just bite the bullet and use the cash - it may cost you interest if you remove this from your offset but there will be no loan affecting serviceability and hours saved not having to worry about calculations and considering if you are saving money or not. its hassle free.

Just go for a cheap a car as possible as they are a depreciating asset.
 
Question: on the table you showed at the end of the 3 yrs, lease is about 9k better off, but you will need to pay the car out? (Residual of 15750?)
Whereas normal car loan you don't?
9.8k better off at the end of 3 years based on the total cash in hand.
In my example, I'm comparing 'Novated Lease' Vs 'Using the money from offset'.
Under 'Novated', we need to pay the Residual of $15750. Under 'offset' I'm assuming that we need to pay back the whole 35K to our own account.

My $25k novated leased vehicle cost me $1000 a month for five years, therefore I paid $60k plus residual $9k for a $25k vehicle over five years. Even a personal loan would have been far better off imo, never again.

Don't forget your monthly fee generally includes
- Vehicle Lease (interest + capital)
- Registration
- Scheduled Maintenance
- Fuel
- Tyre Replacement
- Roadside Assistance
- Comprehensive Insurance
- Sundries (incidental costs)
- Management Fees

PLUS benefits of
- GST free (part of it)
- lower tax paid (lower taxable income)

The reality is car costs LOT more than its purchase price. Some people simply ignore the running cost & opportunity cost :mad:

Having pointed out all the benefits of Novated Lease, I'm less likely to do it again because it
- reduces my serviceability
- additional hassle if I move jobs
- kind of tied to the 3 or 5 year period
 
Thanks All
I really do appreciate all the great feedback and I think Terry nailed it in his reply that there really are too many variables to give a definitive answer.

The one thing that does concern me though with buying outright is opportunity cost. I hear you loud and clear Terry about buying cheap but this next vehicle is going to be a 5+ family car and the wife is having none of it being a bomb. So I am preparing myself for 35k MAX! That is a deposit on an IP!
 
One idea that sprung to my mind was the finance issues...

Drawing $35K on homeloan and while its 4.5% its also over say 15-20 years. That's a huge difference in interest cost v's a five year finance deal that means there is zero debt at end.
 
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