What happens at the end of a novated lease?

At the end of the lease you could choose to make the residual payment to own the car outright.

The residual will be a lump sum payment (aka balloon payment) that's a percentage of the car’s purchase price.

The longer your lease, the lower the residual payment will be.

For example, on a 5-year novated lease, the minimum residual value is 28.13% of the vehicle’s value. If the purchase price of the vehicle was, say, $30,000, that would mean a residual payment of around $9,000 would be required.

You can pay the residual amount using your own savings, or some people finance it using a personal loan.

If you pay out the lease, any leftover funds in your novated lease account will be returned to your employer and paid to you (minus tax).

A common option is to cover the residual payment on the lease by trading the car in and then starting a new novated lease deal with another vehicle.

If you want, your novated lease provider will be able to help you to do this as part of a single process.

That means they’ll facilitate the trade-in of your old car, arrange for the sale funds to be used to pay off the residual value, and if there is a surplus, have those funds paid to you. If the trade-in value of the car is not enough to cover the residual amount, you will need to pay the difference.

The novated lease provider will then help you get set up with a new lease for a new car.

At the end of the lease, you may still be happy with the car you have. You may also want to maintain the tax benefits of salary sacrificing your car and running costs (income tax and GST savings). In this case you could choose to refinance the residual payment into a new novated lease term.

That way, the new lease is only covering the residual amount from the initial lease. So the repayments will likely be lower.

The new lease term is usually also shorter than the initial one, e.g. 1-3 years.

There will be a residual payment for the new lease too, but it will be a much lower amount when it falls due.

The option to renew the lease is generally only available if the vehicle will be less than 15 years old at the end of the new lease term (the same rule applies to used car novated leases).

If needed, your car running budget can be changed to reflect changed costs (for example, the capped-price servicing offered by the manufacturer may no longer be available.)

The best option at the end of a novated lease really comes down to your own circumstances, and importantly whether they have changed since you began your novated lease.

For example, if you need a bigger car, trading in your vehicle and setting up a new lease is a common option. I find that when people get used to the advantages of novated leasing (mainly the tax savings) keeping the arrangement going is very popular.

Whatever your plans, the key thing here is understanding your options from the start, and making sure you're prepared. After all, there is a bit more to think about at the end of a novated lease compared to a car loan.

I generally tell people it’s a good idea to have a firm idea of what you plan to do when you start the lease. That way you can plan ahead.

The residual value of the car at the end of a novated lease is usually a substantial amount of money to pay at once. It can come as a bit of a shock if you're not prepared for it.