Novated Lease - Is It a Better Deal?

I am planning to get a car on novated lease for 2 years. Leasing provider has sent me a quote for $730.13 fortnightly payment.
Cost of car is $43,470. Residual value after 2 yrs is $26.203.20 which includes GST $2,382.11

I am not sure if this deal is good or i would be better off by getting additional loan from my home loan whose interest rate is only 3.42% atm.
Income is $80k a year.

https://files.ozbargain.com.au/upload/191023/74350/quote.jpg

https://files.ozbargain.com.au/upload/191023/74381/novated_l...

UPDATE: Finance has been approved. I am now waiting on the car price and the updated quote with only fuel expenses. Once, I receive that i will have clear picture of how much i need to spend fortnight and all.
Will update you all.

UPDATE 2: Enquired with bank to get additional loan and i was told that i might have to pay extra $1,000 LMI if i want to top up my loan with extra 40K as loan to asset ratio will be more than 80%. Currently it is at 87%.
More Dilemma on making decision.

UPDATE 3: I am not going with novated lease anymore nor i am buying a car. Instead, I am looking to buy a motor bike now.

Thank you

Comments

  • +134

    If you earn $80k don't buy a $43K car. Just don't.

    • -26

      why ? 43K is after GST.

      • +17

        If you just live for the moment then go ahead, no one has a right to judge you.

        However if you want to have financial security when you are older, this certainly doesn't assist you.

        Just remember that if you spend all your money now, you will likely be reliant on the aged pension when you grow old which isn't much.

        • +25

          I agree, my household income is higher than this and I felt bad buying a $13k car.

          Op you are basically paying $20,0000 to have a car for 2 years, does that honestly sound like a good deal to you?

          • @brendanm: I am not having a car for 2 years. The lease term is 2 yrs.
            I am planning to keep this car for another 10 yrs. like my other one which is with me for 6 yrs now.

            • +3

              @Mentallysick: Why have only a 2 year lease then? You will have to have $26k to pay it out at the 2 year mark.

              • @brendanm: we are planning to have a baby after 2 years. thats y.

                • +17

                  @Mentallysick: So on an $80k income you'll be we to pay out $26k, and have a baby and all associated costs? Seems like an odd decision.

                  • -15

                    @brendanm: Yes we should be ok as i plan to draw additional home loan to make balloon pmt after 2 yrs.

                    • +1

                      @Mentallysick: Then just do that to begin with? Can you actually salary sacrifice? I think someone else did the maths, even with salary sacrifice you are still worse off than simply redrawing from your home loan.

                      • -28

                        @brendanm: Salary Sacrifice means putting your money into super fund. How will this help me get a car?

                        • +8

                          @Mentallysick: Not quite. You don't seem to understand the basics on the matter, perhaps you could go see a tax agent/financial planner who should be able to do the sums based on your individual circumstances?

                          https://www.moneysmart.gov.au/managing-your-money/income-tax...

                        • +8

                          @Mentallysick: No, no it doesn't. You need to do some more research on when and how a novated lease can work for you. If you work for certain gov agencies or not for profits you can pay for the car with your before tax income, which reduces the amount of tax you have to pay.

                        • +9

                          @Mentallysick:

                          Salary Sacrifice means putting your money into super fund. How will this help me get a car?

                          You can salary sacrifice into a novated vehicle lease. I did for the Skoda - 1 year lease, then another 2 yrs, then 1 yr. After that the tax savings were only a few hundred a year. I think I saved ~$10k in tax over 4 years on a $30k car with $10k residual after 4 years. The biggest winner was Macquarie Bank.

                          I also salary sacrificed for a laptop but maybe that loophole has shut now.

                          You appear to know so little about the salsac / novated lease system that you should probably discuss the situation with an accountant or financial planner.

                          Borrowing money for a private, non-tax deductable vehicle is a mugs game. Buy what you can afford to pay cash for.

                          Are you aware that you can novated lease a 2nd hand vehicle up to 7 years old?

                          If you borrow off your housing loan then you need the financial resources to pay extra on the loan as if you have taken out a vehicle loan over "X" years otherwise you are paying the car off over the period of the mortgage which negates the savings of the lower mortgage rate

                    • +9

                      @Mentallysick: Shelby if you draw it off your home loan, your home loan interest payments will go up too remember. I don't think spending a quarter of your yearly income and increasing your home loan interest rate in one go is a very good idea.

                      Every single person I know (and I know a few) who has done a novated lease has never been happy with the outcome and were out of pocket more than they expected. Buy the car you can afford today, I know it seems like a sweet deal for a really sweet car but it just isn't. There's so much good advice on here, I urge you to listen to it. Be wise.

                • +1

                  @Mentallysick: You do understand you have to pay the balloon payment at the end of your lease if you want to keep the car right?

                  • -5

                    @jacross: yes i do. I am planning to draw extra loan on my home loan and make the baloon payment.

                • +6

                  @Mentallysick: This novated lease is a BAD idea, do not do it.
                  Especially if you are planning on a kid in 2 years.

                  Buy a good 3 year old car for < $20000.
                  Draw down on your home loan to pay for the car.

                  Then put your spare/extra $700 a fortnight into paying off that home loan as quick as you can.
                  You can thank me after you have your kid.

                  Employers love to offer these leases so they can reduce the amount of superannuation they have to pay their employees.
                  When the employee has a lower taxable income through salary sacrifice, there is less super to be paid.

        • +16

          I work for a big mining company and they have a leasing company on site frequently. From what I can see it encourages people to buy cars they can't really afford but makes it less likely they'll leave work due to the fact they will have to pay out the lease. The leasing company offers poor deals IMO and is the only one we can use.

          • -3

            @Ozbargainite: miner are not smart people went come to money. i was in mining for 5 years now set up for life only work 2 - 3 days a week the good life. so many mate have lost the lot live to high on life big boat big car oversized house i now live in oversize bank repo house pick up song after the crash in 2013.

        • -3

          What? I definitely have the right to judge

      • +34

        After looking at all your comments below, I think the reasons you should not do it are:

        1. You do not understand novated leasing. This is a tax minimization tool which if not used properly will cost you a lot more in the long run.
        2. You intend to do a further draw down in 2 years to pay the balloon amount. This can go wrong in so many ways. Circumstances can change and if you can't borrow more money you are in a whole lot of trouble.
        3. You want to have a baby. They are cute but cost a whole lot of money in many ways you will not expect.

        A lot of people are trying to turn you in the right direction, I suggest you consider it carefully and if you don't understand it, get professional advice.

        When you have a family they will depend on you, think about how you will feel if this decision turns into a financial black hole which then affects your ability to provide a roof over their heads and food on the table. This is the worst case scenario but in life stuff happens.

      • +5

        You must be another Westpac graduate

    • +4

      How much should someone on 80k spend on a car and why? Assume they have the cash to pay for it.

      • -5

        No Cash, planning to draw extra home loan after 2 years and make balloon pmt.

      • +6

        Having cash is different to having a lease and a mortgage. I personally still wouldn't spend $43k on a car even if I had the cash.

      • +9

        If OP has a home fully paid off for and $80k income assuming average liabilities like rates, bills, food…

        I'd say $43k is reasonable then, but it isn't exactly comfortable either.

        Drawing out of the home loan and planning for a kid… I would feel financially claustrophobic.

        • +1

          So assuming it takes 30 years to pay off your house and you buy a house at 20… you can almost get a fully loaded Camry at 50 and be financially responsible… :(

          • +2

            @Circly: If you want to have a fully paid house and not be at the mercy of matters beyond your control, that is the best way.

          • +1

            @Circly: dads only new car in his life was a 83 commodore at the age of 67. he built both his houses with his own hands.

            so far in my life i've bought cars that were 19yo, 13yo, 7yo and 4yo.

            • @Antikythera: Next one’s a new one then!

            • @Antikythera: I was born in the 80s and my car would be worth less than $2k!

              Tempting to buy something new.. But logic comes in.

      • +2

        I earn $130k. My last car cost me $23k, and I’ve had it eight years. I earned about $100k when I bought it.

        I still feel guilt for splurging on it. It was a rash, hot-headed decision. I should have bought a used car for under $10k, and I would have had another $13k to put towards my mortgage.

        • +1

          It seems like the smart decision but then no one is guaranteed a long life… Could drop dead tomorrow and never really enjoyed yourself.

          I suppose it's the 'YOLO' thoughts thst started when I had my quarter life crisis :p

      • Mate, I earn over 100K and I bought a 8K Sports-wagon.

    • +3

      Rule of thumb is to spend 10% of gross salary on your car. Maximum 20%.

      • +4

        Yea id agree with that rule … wife and i only just bought our first ever brand new car (for her of course) .. a $35k hybrid camry. Im still driving a 2008 ford territory which is only worth about $5k. Our combined income is over $200k p/yr…..

        • What are you guys saving for? Or just trying to hit the mortgage?

          • +4

            @Circly: Saving/investing so you don't have to be a wage slave your whole life. I'm in a similar situation as daleyboy high income/old cars, I can't understand why people are so eager to piss away so much money.

            OP seems fine with $17k depreciation over 2 years. That's the same as every weekend, take out $160 cash and get a lighter and burn it. Every weekend for 2 years. Madness.

            If you want to have any sort of financial stability in the future you need to own things that go up in value, not down.

            • +4

              @pav: You don't understand and so you'll never have a great car until you're old.
              Just like I want to have a great car to enjoy it while I'm young, but may not have "financial stability".

              If you're living life for financial stability but not enjoying life, what's the point?

              Subjectively we are both right, because we're valuing our happiness and time differently.

              • +2

                @fatal: Why would a car make you happy? It’s just a way to get between places. It’s a tool.

                If it works and doesn’t break down, it’s doing it’s job perfectly. And you can get a very nice car that will do that for under $15k.

                • +5

                  @DisabledUser77742: Mate, if you live like that why does anyone want the "finer" things in life?
                  I realise this site is called "OzBargain" but I've been here longer than most and honestly, just because you live a frugal life doesn't mean others have to.

                  But a car does make me happy, what's it to you? I'd sure rather get from place to place in an AMG than a 12k Camry, but then you might prefer a house than my AMG. I'm not judging anyone for it, just understand happiness is very subjective.

                  • @fatal: It is subjective, however, the person who bought an AMG did make a poor financial decision.

                    Enjoyment is subjective but financial strategies aren't as malleable.

                    The problem with people "chasing happiness" is that rainy days will happen. People who make bad decisions tend to want to "share" when things get tough.

              • @fatal: I agree it's very much subjective. I'd love to be roaring around in a big V8 sports car, it would bring joy but at the end of the day I don't base my happiness in life on a car and it would waste a lot of money even though I can afford it.

                Also I don't think a 43k car is a 'great car'. I already have a 45k and a 60k car… except I bought them both 5 years old and paid a third of the price on both. The first owners lost $30k and $38k respectively for 5 years of use but now I get 2 good, comfortable and reliable cars for $37k total. I've owned them 12 and 4 years and just service then regularly and they keep going.

                OP could easily do the same and buy an older version of what they are looking at and pocket $17k+. Could throw that money in the stock market and start generating a return or if you want to blow it go on 2-3 big holidays - at least you get some good lifelong experiences from that instead of getting nothing.

                On financial stability, to me that's having enough assets behind me to replace my day job so I can do whatever the hell I want. That's not just enjoying life but enjoying it on my terms. It actually brings me a lot of happiness working towards this goal.

                Maybe it's a psychological difference with buying a car with a loan or leasing it, but once you have enough money to easily buy a new car outright with cash you realise you don't want to let go of that money anymore.

              • @fatal: I spent my 20's wasting all my money, had the hotted up V8 car etc etc.
                Had lots of fun yes, but looking back, wish i had started saving a lot earlier, if i had id probably be driving around in a Nissan GTR right now lol

        • +3

          Yea same. Husband and I make about 250k combined and we're still driving around in our 2012 camry. Makes no sense to buy a new car when we'd rather put that money in our mortgage or investments. The thought of spending 43k on a car gives me hives.

      • I agree, but only problem is the lower under $10k you go, the more likely it is an older car which can have unforeseen problems and maintenance which may cost more over a 3-5 year ownership period.

        • +1

          Sweet spot for cars are generally 5-10yrs depending on manufacturer and make. I purchased a 2010 Audi A3 S-line for $9700 2 years ago. Original owner paid $46,500. Car has served me well with routine maintenance so far. Touchwood.

        • On the flipside, a lot of problems with older cars can be expected as they are more tried and true. Buying a new car can be rolling the dice, especially given the OP indicated the desire to keep it long term.

          That and new cars are cutting corners with cheaper manufacturing and more plastic crap parts which don't hold up over time. Folks are still road testing tomorrows failures today.

  • +1

    Why do you need this car for, and I assume you don’t own the car after this?

    • +1

      For work and lifestyle, planning to keep the car for another 10 years.

      • +1

        If you plan to keep the car, you also need to factor in accumulating funds over the two-year term to pay out the residual of $26,203.20 (plus/minus any adjustments on expenses).

        • Or sell it and pay the difference or re-lease

      • +1

        Yeah as others pointed out it’s a financial hole you are digging compared to your income

          • +3

            @Mentallysick:

            i don't know

            Yep, you should have stopped there and listed to everyone else yelling "DON'T DO IT!"

  • +21

    Question, at any stage do they say the interest rate you're paying?

    Gotta love Novated Lease companies for skipping these key details

    Ok so paying back $17,266.80 over 2 years. At $1392.13/month over 23 months, you're paying $32,018.99 (including $4645.34 worth of fuel)

    You're paying $369(inc)/yr for tyres, which is pointless for a 2yr lease. $1836(inc)/yr for insurance = ridiculous!

    Your lease is $1792/month, inc $194 towards fuel. A secured loan, at 5.5% over 2 years, for $17,000 works out to around $750/month

    • yes comparison rate they gave me is 7.37%

    • +3

      They have to allow for those costs; if you don't end up needing them/using your full fuel allowance then you get the excess funds at the end.

      • do you mean if I didnot use that my tyre cost $335.52 X 2 at the end of the lease term, they will refund me that amount?

        Will it be better off if i do my own insurances and put a claim through later?

        THanks

        • My spouse had a novated lease and that's what happened. Even though the intereste rates were higher it also ended up being cheaper through the novated lease due to the GST/tax savings - not by much though. And for what its worth it was regretted buying an expensive brand new car.

          • @Telcius: why regretted on buying new car?

            • +2

              @Mentallysick: new car depreciates fast - unless you really need a new car you can get a 2-3 year old car and still novated lease it. Have the same tax savings but less depreciation in value if you decide to sell the car afterwards

            • @Mentallysick: Because it depreciates… quickly.

            • @Mentallysick: sounds straight out of Brave New World

      • +1

        minus the income tax you didn't pay

        • -10

          doesnt work like that unfortunately

          you get taxed on your income irrespective of pre-tax deductions (i.e. novated lease)

          • +3

            @paraneoplastic: But your taxable income is reduced though

            • -14

              @John Kimble: i had this impression too, but when i went to do my taxes my accountant told me that's not how it works…

              otherwise all the people on the cusp would load up on novated leases to drop them a bracket

              • +29

                @paraneoplastic: Sounds like you need a better accountant.

              • @paraneoplastic: Yep, that's one main benefit.

              • @paraneoplastic: Did you get a work experience undergrad accountant?

                • +1

                  @dbun1: seems like it, looks like i need to get a better accountant

                  • +3

                    @paraneoplastic: Dropping a bracket doesn't lower the tax paid on all of your other income, it just means you won't ever be paying a higher percentage of tax in that year for the money that you re-directed pre-tax to your lease. Perhaps this is the difference where the confusion edged in?

                    • @sakurashu: This. You only pay the higher rate of tax for every $ you earn over that amount,it doesn't retroactively apply to all your income. For example, the highest income earners pay tax in every bracket.

              • +5

                @paraneoplastic: Your monthly novated lease payment is split into two portions: a pre-tax portion and a post-tax portion. The pre-tax portion of your novated lease payment reduces your taxable income, the post-tax portion does not.

                Source: am Chartered Accountant.

                • @TheGiantTomato: That makes sense, i definitely need to get another accountant then !

                  (that's not what my accountant told me)

                • @TheGiantTomato: yes i understand that the payment is made up of 2 component but i am not sure how they spplit the payment. Apparently if i did 2 years of lease, most of the payment comes from pre tax as a result, more tax saving.

                  • @Mentallysick: The post-tax component is equal to the fringe benefits tax on the vehicle. That way your employer does not need to submit your asset on their FBT statement.

                  • @Mentallysick: You don't seem to be listening to everybody - or you're on here simply to ask people to tell you what you want to hear…

                    You're not saving anything.
                    If you really NEED a car to get from point A to point B, had set aside $20k in cash, and end up buying a $15k car, you potentially would have saved $5k off your projected expenses.

                    At this point you're only looking at spending $43k (potentially more) by going that route. On your income ($80k, according to you), the amount of pre-tax savings you get from going into a novated lease is easily dwarfed by the automatic depreciation on that car THE MOMENT you drive it off the lot.

                    But… it's your money, your life, your family, and your choice. Good luck.

                    • +2

                      @jatyap: Thank you
                      I have decided not to buy a car after everyones comment.

                      Thank you all for saving my $$$.

  • +32

    Investment is too high-yield. Don't do it.

    • +2

      Stop

      • +20

        Hammer time

    • +3

      Surprised I had to scroll this far before this came up

      • Yeah, I was surprised too. Hence the obligatory comment.

    • +1

      Only bankers at Westpac can do it.

    • i also choose this mans high yielding investment

  • +42

    It is a fantastic deal…for the novated lease company. Not so much for you.

    • -2

      oh really? can you please explain why. Never done novated lease.

      Thanks

      • they are a company. they need to make profit to remain in business. that money has to come from somewhere. who else but you would be paying it?

  • +19

    comparison rate they gave me is 7.37%

    my home loan whose interest rate is only 3.42%

    Doesn't this tell you everything you need to know???

    • -3

      No because of tax saving scheme I.e, 32 cents on every dollar after 37k

      • +8

        32% off 7.37% is still 5%… more than your 3.42% home Loan.

        • -2

          what you mean?

          • +16

            @Mentallysick: You get tax benefit but gobbled up by higher interest rates. 7.37% vs 3.42%.

            Yes you save petrol, maintenance, rego, etc due to GST savings and concessional tax (not full FBT exemption, just concessional)

            However, the difference in interest rate is about roughly $3.5k. Does the saving in tax & GST of all these expense equate that much?

            Remember, the residual value is geared towards them, not you. They are effectively lending you only $17k ($43k - $26k) while you have to pay back during the 2 years before the balloon payment kicks in yet you are paying interest on full amount $3.5k

            And also remember, car loan is structured that future interests are built into your loan IN ADVANCE so leaving early will only make them laugh harder.

            I also think for your income, a car for that price may be burdensome.

            It's not a good deal at all.