Your Guide to Novated Lease Residual Values

Understanding the residual value in a novated lease is crucial for managing your financial obligations and making informed decisions about your vehicle lease. 

This guide delves deeply into the mechanics and implications of the residual value, also known as the balloon payment, ensuring that you are well-prepared for the financial aspects of your lease.

What is Residual Value?

Residual value is the estimated value of your vehicle at the end of the novated lease term. It is a predetermined amount, fixed at the start of the lease, representing what the car will be worth once the lease concludes. 

When you request a quote for a novated lease, the residual amount is clearly shown, helping you understand your financial commitments from the outset.

Factors Influencing Residual Value

Initial Purchase Price

The initial purchase price sets the baseline for depreciation calculations, with luxury vehicles and higher-end models depreciating at a different rate than more economical models.

Lease Duration

The lease term also plays a critical role in determining residual value. Vehicles tend to depreciate more quickly in the first few years, so shorter lease terms might have a higher residual value than the initial price.

Vehicle Make and Model

Certain makes and models are known to retain their value better over time due to their reliability, popularity, and demand in the used car market. This makes choosing the right vehicle critical for managing residual value risks.

Uniformity Across Vehicle Types

An important aspect of novated leases is the uniformity of residual value percentages across different types of vehicles, whether electric or traditional internal combustion engine (ICE) vehicles. This standardisation simplifies decision-making by removing one variable from comparing different vehicle types.

Impact of Residual Value on Monthly Payments

A direct relationship exists between the residual value and your monthly payments:

• Higher Residual Value: This results in lower monthly payments as you finance a smaller portion of the car's total cost.

• Lower Residual Value: This leads to higher monthly payments, reflecting a higher depreciation rate.

Managing Residual Value at Lease End

As your lease term approaches its conclusion, the residual value becomes due. This phase requires careful planning, and your leasing company will contact you to discuss your options. These discussions may include whether to return the vehicle, buy it out by paying the residual value, or refinance the balloon payment. 

Importantly, the residual value cannot be covered through salary sacrifice arrangements and must be paid with after-tax money.

Strategies to Optimise Your Lease

Choose the Right Car

Opt for cars known to retain their value, as they offer more favourable residual percentages, which can influence your financial commitments positively.

Align Lease Term with Usage

Select a lease term that matches how long you intend to use the vehicle, ensuring the residual value accurately reflects the vehicle's condition and market value at the lease end.

Research Vehicle Depreciation

Understanding how different vehicles depreciate over time is crucial. This knowledge helps you select a vehicle to meet your needs and maintain its value.

Regular Vehicle Maintenance

Keeping the vehicle in good condition is vital. Regular maintenance and care can prevent excessive depreciation and help maintain the car's residual value.

Wrapping Up

By fully understanding and strategically managing the residual value, you can enhance your leasing experience, optimise your financial outcomes, and ensure decisions that align well with your financial goals and lifestyle needs.

Ready to take control of your financial future with a novated lease? 

Contact Novated Finance Australia today to explore your options and find the best lease strategy tailored to your needs. Don't wait—optimise your lease terms and ensure your vehicle's value today. 

Frequently Asked Question

• What if the car's market value is below the residual value at the lease end?

  If the market value is below the residual value at the end of the lease, you may pay the difference if you decide to purchase the vehicle. Alternatively, you can choose to return the vehicle.

• Can I renegotiate the residual value during the lease?

  Typically, the residual value is fixed at the beginning of the lease and isn't subject to renegotiation during the lease term. However, terms can be reviewed upon lease renewal.

• Is it better to have a higher or lower residual value?

  It depends on your objectives. A higher residual value lowers monthly payments, which might be beneficial if you plan to return the car. A lower residual value could be better if you intend to buy the vehicle at the end of the lease, as it could lead to lower overall cost.