A novated lease can offer tax benefits and bundled vehicle expenses, but it may reduce borrowing capacity and slightly affect superannuation contributions. While it doesn't directly harm your credit score, lenders will consider it when assessing loan applications.
A novated lease can be an attractive option if you’re looking to finance a car and potentially unlock tax savings, but perhaps you’re wondering how it impacts your financial position? Will it affect your credit score? Could it impact your home loan application? Is it worth it? At Fleetcare, we understand that making financial decisions requires clarity, so let’s take a close look at the key considerations about novated leases and their effect on borrowing capacity, credit scores, and superannuation.
Do you need good credit for a novated lease?
A novated lease is a type of car financing, and like any financial commitment, it requires an assessment of your creditworthiness.
While you don’t necessarily need a high credit score, a poor credit history could still impact your ability to secure a novated lease. If you’ve had past defaults or significant financial difficulties, lenders may be hesitant to approve the lease. That said, if you enjoy a stable income and manageable debts, then you could still be in a position to access the benefits of a novated lease.
A novated lease and your borrowing capacity
One concern you may have is whether a novated lease will impact your ability to secure a home or personal loan. The answer depends on how lenders assess your financial commitments.
Mortgage lenders typically evaluate your borrowing capacity based on existing financial obligations, and a novated lease is included in these calculations. Since lease repayments are deducted from your salary before it’s taxed, they reduce your taxable income, which may lower the amount you’re eligible to borrow for a home loan.
However, this doesn’t mean having a novated lease will prevent you from securing a mortgage or personal loan — it simply means your lender will take it into account when assessing your ability to make your repayments. If you’re planning to buy a home soon, it’s always good advice to discuss your novated lease with a financial advisor or mortgage broker to understand its impact on your borrowing capacity.
Is a novated lease worth it?
A novated lease offers several benefits, making it worthwhile for many people:
- Potential tax savings – Lease payments are deducted from some of your income before it’s taxed, potentially reducing your taxable earnings. Or in other words, you could pay less tax and keep more pay in your pocket each pay day.
- Save GST on the purchase price – Since the employer leases the car on behalf of the employee, you typically save GST on the car’s purchase price.
- Access fleet discounts – Because we buy a lot of cars, if you’re looking for a new car you could access additional discounts reserved for businesses.
- Bundled costs – Running expenses, such as fuel or charging, registration, maintenance, and insurance are included in the lease, simplifying budgeting.
While these benefits make novated leasing an appealing option, it’s important to consider your personal financial goals. If a reduced borrowing capacity for a home loan is a concern, it makes sense to weigh the advantages of the lease against your long-term financial plans.
What about superannuation?
A novated lease comes out of your pay before it’s taxed, meaning your taxable income is lower — but what does that mean for superannuation?
Superannuation contributions are typically calculated based on your gross salary (before deductions). Because novated lease repayments are deducted from this amount, it could slightly reduce the contributions made by your employer, affecting your long-term retirement savings. However, one remedy is to make a voluntary superannuation contribution to offset that reduction.
Checking with your employer or financial advisor can clarify how a novated lease might influence your retirement savings.
Do you pay interest on a novated lease?
Yes, a novated lease includes interest charges, similar to other financing methods. The leasing company finances the car’s cost, and repayments include principal and interest over the lease term. The interest rate is determined by the leasing provider and depends on factors like lease duration, car cost, and market rates.
While you do pay interest, the tax advantages of a novated lease could make it a more cost-effective option compared to personal car loans. Additionally, lease costs can be bundled into a single payment, covering expenses such as servicing, insurance, and fuel, providing further financial convenience.
Is a novated lease right for you?
A novated lease could be a good option if you’re looking to finance a car while benefiting from potential tax savings and bundled expenses. However, understanding its impact on credit scores, borrowing capacity, home loans, and superannuation is essential when making financial decisions.
If you’re considering a novated lease, Fleetcare’s experienced team is here to help.
So, if you’re interested in learning more, contact Fleetcare today on 134 333