New Car - Novated Lease Vs Cash

Hi Ozbargainers,
Here is another novated lease question. More popcorn for everyone. Apologies for formatting - still new to this.

I’ve read the comments from last forum (https://www.ozbargain.com.au/node/497372); my situation is a little different am I’m just trying to see if I am missing anything from my calculation.

Current situation:
• Upgrading from small used hatchback (2012 Fiesta) as bub is on the way in Dec
• Pretty much set on the HRV VTI-LX (for the boot and rear cabin size, and the wife wants all the bells and whistles inc leather seats)
• Have considered all other compact SUVs (C-HR, CX3, XV, ASX, Selltos, Kona)
• Larger SUVs (aka RAV4) will be too big for the streets in my area (inner west Syd)
• Have looked at the used car market; not many still in warranty (pregnant wife wants peace of mind); most 2017 models (HRV VTI-L) are ~28-30K.
• Income: 93K (exc super)
• Mileage: 5,000 km per year

I am currently comparing 1) cash upfront and 2) novated lease.

Option 1) Cash upfront
• I have more than sufficient funds in my mortgage offset to pay for car in full.
• Total cost over 2 years = $45,460.
Breakdown:
• Car purchased with cash = $38,000 (RRP driveaway $38,990)
• Running costs = $4,800 over two years
• Interest paid after taking $38K out of mortgage offset (@3.5%) = $2,660 over 2 yrs

Option 2) Novated lease
• Total cost over 2 years = $42,558.
Breakdown:
• Lease cost = $427 per fortnight x 26 fortnights/yr x 2 years = $22,204
• Includes running costs for maintenance, tyres, rego/CTP, insurance (self arranged), fuel at $4,800 over 2 years (same assumptions above)
• Residual value/Balloon = $20,354
• The intention is to pay the balloon at the end of 2 years and keep the car
• The quoted interest rate was 7.5% (but I don't see how this affects the calculations if I am using fortnightly repayments cost)
• My job is quite stable, and I don’t see myself changing jobs in 2 years

Option 3) Finance
• Quoted by Honda at $170/week for 5 years, zero balloon.
• Total cost over 5 years: $44,200 (exc running costs) for $38,000 car. Therefore not considering it.

Am I missing something in my calculation?

Poll Options

  • 17
    Cash upfront
  • 8
    Novated lease
  • 2
    Finance
  • 37
    Buy used

Comments

  • +3

    Tax benefits to consider with a novated lease

    • -1

      Yes, at $93k you're not far into the 37c bracket and the lease would likely drop you into the 32.5c bracket. I haven't done the calcs as I can't be bothered but OP should as this needs to be considered in the decision. Other tax implications as well.

      • +3

        I dunno how the tax on a novated lease works, but $3k into a 4.5% higher tax bracket is $135. Doesn't really seem worth considering for the purchase. Maybe for a nice dinner after.

        • +7

          I get the feeling that many don’t know how tax works. The tax bracket thing means the tax rate changes for the dollars you earn over the amount.

          Ie earn $93k only $3k is taxed at 37c, not the whole $93k. The bit under $90k is fixed at $20797.

          Cutting back your income to get under the next tax bracket is a dumb idea because you are just earning less.

          • @Euphemistic: I hear what you're saying, but what a novated lease allows you to do is partially pay for the car with pre-tax dollars, so you end up with more $$ in the bank. i.e. it's good to earn less if you were going to spend your pay on the same think your salary sacrificing for, in this case, the car.

            • @SlickMick: Of course paying with pre-tax dollars is a good thing - provides you’ve done the sums properly and it is actually a saving overall. Seems that most people get carried away with ‘saving tax’ and forget that it might be costing them more in interest or maintenance somewhere.

              The answer is: so your own sums, but don’t forget ALL the factors.

              Personally I looked at a lease years ago when we needed to upsize for our growing family and despite any figures it was just too locked in for us. Maybe it cost us more by redrawing from the home loan but I felt better knowing that if something changed (like a surprise child) I didn’t need to find $xx per week and the somehow find the balloon payment at the end.

              • @Euphemistic: But you could have just withdrawn from the home loan to pay out the lease.

                For my figures, twice, the figures were pretty similar. The lease company knows what a good deal a novated lease could be, and take their cut first with an exorbitant interest rate and monthly fee, which erodes very close to all the benefits.

                A community-funded novated lease at competitive interest rates would be a game changer.

                • @SlickMick:

                  But you could have just withdrawn from the home loan to pay out the lease.

                  Good point. I guess that my bias is towards save first then buy, rather than lease/rent etc and save for it later. The funds we re-drew were available due to an investment property sale at the time as well, so real funds available at the time. I also didn’t like the idea of being locked in to the lease.

                  end of the day it’s up to the individual to determine what is best for them. Happy to borrow on an appreciating asset - property, not for a car.

  • +2

    Kia sportage, used, 1 to 2 years old. 7 year warranty, fully transferable. ~ $25K

  • -1

    Just from your figures

    • Mileage: 5,000 km per year
    • Running costs = $4,800 over two years

    thats 50c a km, just on "running costs"

    Plus Depreciation
    Plus Interest

    Novated lease

    $427 per fortnight… $22K

    So that's $2.20km plus running costs
    Rough Total $2.70km (less any tax savings)

    This is a bargain site so thats no bargain. But it probably helps the nations economy more than the tax cuts they announced

    • Unfortunately the car is a necessity. My current running costs on a fiesta are equally high (~2k a yr).

      The novated lease cost of $427 per fortnight includes the running costs (estimated @4,800 over 2 years)

      • +3

        I am sure it is, but from a fiesta to a $40k car that’s only going to be driven 5000k a year. That’s less than 100km per week , or 15kms a day.

        Sure you need a reliable car, but surely a $20k car would hold up very well for that amount of mileage each day. In fact you will probably need to replace the battery before you even change the tyres.

        Or as others say, buy used. My Camry was 1 year old with 15k kms on it that was $10k off the rrp at the time. Like new and factory warranted used car. Far better value.

        You asked for an opinion, sorry you also got it. 😀🤠

        • Appreciate the opinion.

          I am open to used cars (hence there is the poll option), but I can't find a suitable deal at the moment. The wife will also need some convincing.

          We prefer to upgrade once and therefore looking at SUV (bad backs unfortunately); and out of all that we've seen the HRV is the front runner. Sportage/RAV4 etc are a little too big for us; every cm counts where I live.

          Am open to any other suggestions though.

          • +1

            @GHKC: 5,000km is such a small amount, I'd agree with people recommending a used car, something you can service once a year without hassle

            • @spackbace: Go for a used car. A car depreciates most in the first 3 years. A 3 year HRV is ~$29700. That’s $8300 in your pocket! That’s $8300 to use in repairs in case. Modern Asian cars are reliable and won’t fall apart in 3 years anyway. For peace of mind and wife approval you can get it checked by a mechanic before you buy.

              If you’re negotiable with the model then you could opt for a Kia with the 7year warranty for additional peace of mind.

              Bonus credit: take that $8000 and invest in an ETF and give your kid a cheque for $34,000 on their 18th bday to buy their own CRV yeahhh!

    • I think that works for running costs. Assuming they fill up every 500km for $75 (~$1.50/L) that's $1500 in petrol alone.
      That leaves $1600 for rego+insurance+maintenance. Which probably isn't enough.

      So, undervalued if anything, if I haven't ballsed up the math.

  • Cash

    Negotiate on the driveaway price down from 38K to 36k or whatever you could get(based on your negotiation skills).

    As your novated lease will reduce your taxable income so you lose out on the recent full low and midle income tax offset. As at 90K salary you'd be getting the full $1080. Per annum for 2 years (assuming you have other tax deductible expenses of 3K).

    Negotiating and LMI tax offset works out to be better option.

  • will you be using the mortgage offset to pay for the ballon?

    • Yes, in 2 years time. As above there's more than sufficient in the offset to pay the balloon.

      • +1

        then you should add this as well : Interest paid after taking $ballon out of mortgage offset (@3.5%) = $x over x yrs

  • Is your pay going to increase? If so yeah…

  • -2

    In both cases, you're borrowing money and paying interest on a depreciating asset. The only time you should be doing that is to buy a used car. New cars depreciate significantly in the first 1-5 years of ownership. After that, the depreciation is much slower. If you buy a used, 3 year old car, the original owner has already paid for the worst part of the depreciation for you. Plus, if you decide to sell it in 5 years due to financial emergency or wanting to upgrade, you can usually get very close to the original price you paid for it.

    Think carefully before buying a new car in any case, especially if it's on borrowed money.

    • +2

      Think carefully before buying a new car in any case

      This from the person that bought a brand new Mustang

      Do as I say, not as I do?

      • Probably buyer's remorse. Regretting buying a new car, after buying it!!

      • -1

        Because buying a performance vehicle used as a project car is a lot different to buying a family SUV. My car will be worth more than it's sticker price in a few years because I'll be doing a lot of work to it. Given the nature of the car, there's no such thing as a used V8 that hasn't been already thrashed to the wall. It only made sense to buy new in that case.

        Same goes for buying an exotic car like a Porsche. They're known to fail out of warranty periods so if you're going to get one, you want it new. None of these apply in OP's case.

        • +7

          a project car

          But you said:

          I seldom rev any car above 4k. Going fast is for idiots with small body parts.

          Getting an exhaust was also a consideration at one point but unfortunately having grown up in Sydney took virtually all the respect out of it due to countless hoons putting loud exhausts on their cars just to drive around city streets on a Friday night.

          And now

          because I'll be doing a lot of work to it.

          Come off it. Stop contradicting yourself. 1 minute you won't even put an exhaust on it, the next minute it's a 'project car'.

          Given the plethora of Mustangs now on the used market, and the huge drop in depreciation since the first batches received a shit safety rating, it would've made sense to buy used if it was truly a 'project car' as you don't need to give a shit about warranty.

          My car will be worth more than it's sticker price in a few years because I'll be doing a lot of work to it.

          No, it won't, everyone who builds an actual project car knows they won't get the money back, it's done for their own pleasure.

          Not sure who you're trying to delude more, us or yourself.

        • Hahahaha oh my, modifying a car that you purchased new, that is now used, makes it worth more than a new one?

            • +1

              @SlavOz: A couple of things. No, they are not worth more. You have spent way more than you will get back. If you want a car that will increase in value, buy a 70s 911 and restore that.

        • +2

          Your car will be worth less than what a new one will be no matter what you modify it with.

      • +2

        C'mon Spackbace… he needs to drive in style to eat out and justify it with inflated electricity and water usage stats.

        All in good fun SlavOz 😉

    • Beneficial if you have high tax bracket. E.g. over LMI threshold as minimum. Also, if he drives for work such as client meetings etc, very beneficial in terms of tax dollars. So it's circumstancial.

      • Lmi threshold?

  • Find a almost new car and get your lease company to lease it…..Example, one 2019 Mitsubishi outlander LS 4000 ks sold for 28500…..5 year warranty…. but not 36k from dealer….

  • Larger SUVs (aka RAV4) will be too big for the streets in my area (inner west Syd)

    Isn't a RAV4 and HRV the same width?

    What about a 2-3 year old Outlander?

  • +1

    How Frequently do you intend to use your car? How many days in a week do you need one? Just weekends OR do you intend to use it nearly everyday.
    If it was'nt a PITA for baby seat in and out of the car I would have suggested car sharing options like Go Get. In Inner Sydney you have a fairly good access to cars everywhere.
    Even with the most premium plan of $ 30 a month, you are well ahead. You save on Rego, CTP, Insurance, Maintenance. Best of all you can also rent out your parking space if you are in an area of demand and make additional money of it.

    I had tried it for one year before I got my own car. I only got my own because I needed a car atleast 3-4 days in a week once my daughter started her sports and dance routines.

    • I have looked into GoGet and used them (for vans). The killer is the hourly cost as I am usually at friends and relatives for many hours. It worked out to be $2k a year, which is the same as owning a car, but without the convenience. Car sharing also won't be possible now that the bub is on the way too…

  • Finance option is missing the interest saving of leaving cash in mortgage. If the comparison rate the vehicle finance is offering is like those 1% deals you sometimes hear of, it might be slightly more favorable than it currently isn't.

  • A couple of things, on your salary leasing doesn't get the tax benefits. Also, that balloon payment is the real killer and if it is being paid coming off the mortgage, then you could do the same with finance/loan after two years. People fall into the leasing trap, where they end up continually leasing brand new cars every 5 years and that is definitely not the thing to do.

    Also buying new vs old, the focus is always on the depreciation, but my last new car I had for over 15 years and it was a new Honda Jazz at the time. I had very little go wrong with it, I knew how the car had been treated and had very little issues with it. Every second hand car I've bought has had issues and cost me money to repair/maintain. Also lets say you are going to own the car for 10 years, I'd rather own a 10 year old car than say a 12 yr old car after 10 years, the risk of needing major repair or maintenance is higher.

    Finally I'd be talking to more banks than just getting a quote from Honda. My Loan on a $38k car is costing me about $130 a week.

  • +3

    Get the cheapest car your ego can handle being seen in.

    Not sure why seem really set on buying new. A decent used car is very very easy to find so maybe you need to try a bit harder. For such a low number of KM p/a, you're wasting money on a new vehicle.

    However if you want the smell of a new car, which I believe everyone should experience at least once in their life, go for it.

    I'm no tax expert but low KM means you won't get huge tax benefits. You also mentioned that your wife is pregnant. You will have a lot of expenses for the next 20 years or so…

    I'd chat with the banks, maybe look at a Hire Purchase with a lower balloon or something like that. Novated leasing works best when you're doing a lot more KM.

  • Buy a Rover Evoque

  • +2

    Thanks for the comments everyone. I've decided to follow everyone's advice and find a nice used one and convince the wife that it will be fine. It doesn't help that my current car (Fiesta) bought used, was a lemon (down to my inexperience and bad research at the time).

  • Doesn't matter if you got a Phd in Novated Lease, it's always fails as a ozbargainer.
    It's only favorable if you earn fair amount of money $180k+, can claim on driving and you prefer to have new car every now and then.

  • Total cost over 5 years: $44,200 (exc running costs) for $38,000 car. Therefore not considering it.

    I don't get OPs point, nor the votes, other than sure, a 2nd hand car is obviously more economical.

    But the OPs figures show the finance option over 5 years is less than paying cash over 2 - therefore he's not considering it!! what the????
    And the novated lease is also less than paying cash (by OPs figures) - even omitting tax advantages?? So it also gets less votes!!??

    • The finance option does not include running costs, the other two options do.

      • lol that's a funny way of wording things "Total cost …. (exc running costs)" … so NOT total cost then!!

        So OPs logic is okay then, but I still question those voting for paying for mortgage over novated lease - did I miss some twist in OPs lease calculations too (other than ignoring the tax advantages)??

    • +1

      SlickMick not so slick

    • +1

      I'd also like to know why novated lease didn't get more votes purely based on what the OP originally wrote.

      I understand used car is more cost-effective, but why isn't novated lease the clear winner of the new car options regardless of if he gets more benefits on a higher income?

  • I couldn’t sign my novated lease without talking to a financial planner. You should do the same as they should help you decide which option is best for you.

    My Novated leases worked out to be a very good deal because of the salary sacrifice benefits. (Tax advantages, less running costs because of benefits etc). Each type of employer has different levels though.

    • Your employer isn't footing the fringe benefits tax are they? Usually they follow the tax office rules, which is that the equivalent of FBT amount must be deducted after tax, the rest of lease is salary sacrificed.

  • Lease cost = $427 per fortnight x 26 fortnights/yr x 2 years = $22,204

    Note that not 100% of your fortnight pay goes to your car. So your residual is not simply 40558-22204. Only a portion of your payment goes to the car. In order to know that, you have to get a detailed quote.

    I'm considering NL too atm, difference is im higher on income and i defo buy used <25k.

    Now what i want to know from the expert is, at end of lease, what's the price to buy outright say when residual value is 20k on 2yrs NL?

    Is it based on NL company calculation or based on ATO, which is 56.25%, so outright payment for 20k residual value is 11,250? Is it really that simple?

    I haven't reached out any NL company yet, just trying to figure stuffs out.

    • Oh I didn't notice OPS calcs have residual = purchase price - lease payments. That's would be a major coincidence. I'm starting to think OP has written gibberish to cause confusion - I got caught out with "Total cost …. (exc running costs)" too.

      I believe his NL figures are too good to be true - especially since he has ignored salary sacrifice tax savings and GST savings on running costs yet still reckons it's cheaper than outright purchase.

      Minimum residual value is determined by the tax office, which is what the lease company will use (in my experience). But that's based on a new car. If you buy a 2yo car, it has already depreciated 56.25%. So wouldn't the residual on a 2 year lease be 37.5% of original vehicle cost when new??
      I've never leased 2nd hand, so I don't know about this.

      • Never based on the age of the car i believe. Its always on the terms of lease, at least from a quick google.

        https://www.positivelendingsolutions.com.au/resources/inform...

        • That's the same info the ato provides, but it doesn't mention the age of the car. What it does say is that the ato considers a life of a car to be 8 years. To me that implies what I said. So I'd expect a 2 year lease on a 6yo car would have a residual value of $0.

          Happy to stand corrected if I'm wrong.

          • @SlickMick: Not sure if i missed anything else but based on your explanation, that means by end of lease, you won't have anything to pay to own the car? Sounds too good to be true? Cause i am actually eyeing 2013 car atm haha. If that's the case, I'll go for NL right away!!

            • @Ch Rs: From my understanding, at the end of two years, you have a few options:
              1) walk away and lose the car (or setup a lease on a new car)
              2) the residual needs to be paid to own the car
              3) setup new lease on the current car

      • These were the figures provided in the quote.

        -$427/ft for 2 yrs (Inc running cost)

        -residual value (aka balloon) = $20k

        The rest were my calculations based on my assumptions, not intended to cause confusion.

        As everyone has suggested, I'm leaning more towards buying used

        • Buying used with NL or std car loan?

          You could ask them to remove all those running cost add ons and byo instead, reducing your fortnight payment.

        • I have 2 cars that are currently under novated lease and it works for me.

          If you don't already know, the $427 fortnightly you have been quoted is not the actual cost. It is your budget estimate. Your novated leasing company will set you up an account that the $427 will be deposited into. As you claim items related to your vehicle such as fuel/insurance/servicing, the money will be withdrawn from your novated lease account. This is the good part as whether you novated lease or not, these items still need to be paid when owning a car.

          Now the bad part: The interest rates that the novated leasing company charge on the actual vehicle are horrendous. Myself and others that I have spoken to that actually have "good" novated leases all agree that the only way to make a novated lease work is to lease a second hand car that is purchased for (well) under $15,000 as this keeps the interest component of the repayment down whilst enjoying all the other benefits. I pay $125 a week from my take home pay for one car which includes everything (the car repayments/fuel/insurance/rego/servicing etc.) over five years. The car is nothing fancy but its newish and gets me from A to B. I also haven't travelled as far as was budgeted for, so there's a couple of grand sitting in my novated lease account. I'm happy.

          • @DisabledUser53603: Can you answer CH Rs query re the balloon payment on a 2nd hand car?

            The ato says a car is depreciated over 8 years, so buying a 6yo car, I'd expect the residual value to be $0. Am I wrong??

            • @SlickMick: My understanding is that there has to be a residual/balloon payment and the percentage is based on the length of the lease (not the age of the vehicle).

              Also, if you buy a new car or a second hand car from a dealer (who charges GST), even though you don't pay the GST on the vehicle when purchasing, the GST (as a percentage) is added back onto the residual which you will then need to pay.

              • @DisabledUser53603: I feel like I'm being stubborn here and not listening when I'm wrong :)

                Everywhere I've read agrees that there must be a residual value… but I suspect that will be just the GST portion as the depreciated value = $0 at 8 years.

                But it is also always based on the age of the car (not mentioning the specifics when leasing 2nd hand) - so a bit ambiguous.

                Just as an example, if I lease a new $100,000 vehicle over 1 year, the residual would be $65,630.
                If I then took another lease on that vehicle, are you saying the residual value would be 65.63% of $65,630 = $43,073?
                Coz ATO says residual value of a 2yo vehicle is 56.25% = $56,250.

                I haven't seen any specific evidence either way, other than Toyota does mention that it's based on car's original value here:
                https://www.toyotafleetmanagement.com.au/novated-lease/expla...

                Really need someone who has leased a 2nd hand vehicle to put an end to this debate :)

  • +1

    This topic is novated lease vs cash, so here are my actual numbers for 2 cars over my five year novated lease term (not including costs that have to be paid either way such as fuel/insurance etc):

    Purchase price Car 1: $17,500 and Car 2: $15,000. Total: $32,500

    Car repayments from novated lease account, Car 1: $338 per month and Car 2: $297 per month or $38,100 over 5 years
    Residual/balloon payment (28.13% of purchase price) Car 1: $4,923 and Car 2: $4,220. Total: $9,143
    Novated lease fees: $16 per month or $960 over 5 years.
    Total costs: $48,203 over 5 years

    Tax savings (37% income tax bracket) = $168 per fortnight or $21,840 over 5 years

    Novated lease vehicles cost: $48,203 minus tax savings: $21,840 = $26,363
    Paying cash outright costs $32,500

    Novated lease is the better option by $6,137

    (there were also some initial novated lease setup costs but I don't remember the exact figures. A few hundred dollars by memory. Also not included is the GST you get refunded on purchases such as fuel etc. or the interest you would save by leaving the initial purchase price in an offset account on a mortgage).

    1. The cash price seems ridiculously high. $1k on a top of the range model is a joke. Folks bought a HRV VTi-S recently for $28k driveaway, RRP $32k.

    2. FBT will kill off any "tax" benefit. My friends and I are on the highest bracket and none of us can justify novated lease.

    3. Logically doesn't make sense. Adding a middle person, as well financing a car is cheaper than cash outright? Must add up somewhere.

    Buy used, otherwise cash upfront. (Of coz, if you can have better use for money - ie 8%+ return, finance the car.