Home loan vs novated lease - Case Study

Many people wrongly believe that the cheapest way to pay for a car is to redraw from their home loan. Although it may appear attractive in the short term, here we’ll detail exactly how and why it’s not as cost effective as salary packaging with a novated lease.

In order to make the comparison, we’ll assume the following salary and vehicle details.

The next step is to determine the running costs of the vehicle. This is part of the first step in our five-step lifecycle model.

*Lower costs due to Autopia fleet discounts

The total cost of running the Prado for a year with the home loan redraw is $14,483. The cost with a novated lease, is $24,922, which is why many believe the home loan to be the cheaper option.

That’s not the whole story however.

While you’re only going to hang onto the Prado for four years, the money that’s been borrowed from the home loan is paid back over the length of a much longer term. What this means is that by the end of the four years, you’ve been paying back mainly interest, and hardly any principal on the vehicle.

So when you sell the car (for a lot less than you bought it for) and put the money back into your mortgage, there’s a substantial shortfall there.

With a novated lease you’re paying off a lot more of the principal, so when it comes time to sell the car you actually make money, as opposed to losing it.

The other consideration here is the opportunity cost. In other words, what else could you be doing with the money, if you didn’t use it to pay for the car.

These costs add to the picture, and are summarised below.

As you can see, when you look at the big picture as opposed to just the month to month costs, salary packaging the Prado in this instance saves you $4,594 a year.

Over the term of the lease, that’s a massive saving of $18,377.

Summary

All of the above costs include GST.