Fully Maintained Novated Lease

What is a Fully Maintained Novated Lease?

In my last post I described what a Novated Finance Lease is. A fully maintained novated lease is similar to that discussed in the last post except that the operating costs of the vehicle are included as part of the monthly lease payments. The types of things which can be included are registration, maintenance (including things like tires), and petrol.

This type of lease is normally offered by an external lease management provider. There are of course costs associated with this - their goal is a to make a profit after all. When I was shopping around some of the costs seemed quite high. My suggestion to you would be to shop around. Look for the best deal. And make sure you understand what you're getting into.

Don't be fooled by the tax benefits. Given the right circumstances, setting up this type of arrangement with your employer can be quite tax effective. This will depend on your income level, the type of car and the annual kilometers traveled among other things. But make sure you offset the leasing costs against these potential tax benefits. If the costs are too high, they may negate the tax benefits.

But if set up properly, a fully maintained novated lease can be quite beneficial. By salary packaging the operating costs of the car, you can save a significant amount of money.

It should also be noted that the lessor carries the risk of the residual value under a fully maintained novated lease.

Novated Finance Lease

What is a novated finance lease?

In the coming articles I am going to describe the 3 different types of novated lease. These are as follows:

• novated finance lease
• fully maintained novated lease
• fully maintained novated operating lease

So what is a novated finance lease? Under this type of agreement, you will get full use of the car and in return you agree to make a certain number of payments at an agreed rate for an agreed period. At the end of the period you pay the remainder and end up owning the car. As with all of these situations, payments are deducted from you pay and made the the financier by your employer. It has the usual benefit of using pre-tax dollars.

In some ways this is just like normal finance you would obtain to purchase a vehicle, except that your employer is making the payments on your behalf.

There are a number of things to consider here.

The Amount Financed:

This is effectively the amount you're "borrowing". This will be determined by the purchase price of the car.

The Interest Rate:

This is the rate at which you'll be obtaining the finance. Interest is normally calculated and charged as part of the monthly payment.

The Term Of The Finance:

This is the period over which you will be making payments under the lease.

The Residual Value:

This is the amount you will need to pay to the financier at the end of the lease. It is agreed at the beginning and is meant to be an approximation of the market value of the car at the end of the term.

Risks of a Novated Finance Lease.

The main risk attached to this arrangement is the residual value. Because the actual value of the vehicle is not known at the start of the agreement, there is a risk that the actual resale value of the car is less than the residual amount the lessor is required to pay when the time arrives. This means the lessor is carrying the valuation risk under this type of lease.

Despite this fact, many car leasing companies offer a novated finance lease as part of their product line.