A common question that comes up when people are looking at a novated lease to buy their next car is, what are residuals and how do they impact me?
First things first, residual values and balloons are the same thing. Ballon is just jargon that is commonly used in the industry. For the purpose of this article, we will stick with calling it a residual value.
A residual value is a portion of the lease repayment that is set aside at the start and not paid down. Then at the end of the term, it becomes due as a final payment of sorts. As an example, using round numbers, if you get a $100K car with a 25% residual value, you will pay off $75K over the course of the lease term and have a $25K residual value which will be due at the end of the term.
Residual values are very common in commercial lending and mandatory when you get a novated lease.
What you do with the residual at the end of the term, we will cover off in a moment.
The ATO has set residual values based on the length of the lease you are taking. There is some room for movement outside of these values (usually around 5 – 10 %) to allow for specific situations. For example, if you generally drive high kms you may wish to reduce your residual value a little bit to be inline with what you think the vehicle will be worth at the end of the lease.
The table below are the current residual values as per the ATO.
| Lease Term | Residual Value |
|---|---|
| Year 1 | 65.63% |
| Year 2 | 56.25% |
| Year 3 | 46.88% |
| Year 4 | 37.5% |
| Year 5 | 28.13% |
There are a few options when your lease is coming to an end and it is time to pay your residual value. Commonly, people will just trade in their car and it will pay off the residual. In some cases, they will get more than the residual value which they can keep as tax free profit, in others they may have to make up the difference.
It is important to discuss your residual values at the start of the lease to make sure it fits with your car and lifestyle. If done correctly, you can walk away with some tax free profit!
If you are happy with your car and it fits within the age limits (generally no older than 12 at the end of the term) you can re-novate it and kick off a new lease on the same car. This means your new lease pays out your old residual and you start fresh.
If you are happy with the car and just want to own it outright, you simply pay out the residual value and the car is yours!
In some cases, there will be a “hand back” option. Hand back options change from provider to provider but generally, so long as the car has only seen fair wear and tear (no big damage etc) you can simply hand it back and move on.
If they sell the car and make a loss, it is their problem but if they make a profit, they also get to keep it. This can be a great option to have as an option however just make sure it isn’t compulsory to hand it back at the end. It is nice to be able to do whatever you want at the end of your lease in case you do want to keep the car or sell it yourself.
Moral of the story is, residuals are mandatory and nothing to be scared of. Speak to your consultant when setting up your lease to make sure they are the right amount for your lifestyle and vehicle and away you go!
Find out exactly what a novated can do for you! Request a quote today, speak to a leasing expert and they will prepare a free quote so you can see the numbers in black and white.
