Speaker 1: Welcome to How Do They Afford That? The podcast that
Speaker 1: peaks into the financial lives of everyday Australians. Oh Michael Thompson.
Speaker 1: I'm an author and the co host of the business
Speaker 1: news podcast Fear and Greed. As always, I'm with Canna Campbell,
Speaker 1: financial planner and founder of Sugar ma'm a TV, the
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Speaker 1: find twelve Months to Financial Freedom at wherever you order
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Speaker 1: order it in for you. Coming out in September. Anyway,
Speaker 1: today's episode Canna is very much I would say, driven
Speaker 1: by the that's a pun, but you won't understand the
Speaker 1: pun until you hear what the topic is.
Speaker 2: Unless you've read the title of the podcast.
Speaker 1: Oh that too, yeah, good point, good point. It is
Speaker 1: driven by the cost of living, right, and the cost
Speaker 1: of filling up a car with petrol or diesel, which
Speaker 1: really really hurt earlier this year when almost overnight prices
Speaker 1: shot up and what was kind of maybe one hundred
Speaker 1: dollars I'm thinking about my car diesel, right, yeah, and
Speaker 1: it was one hundred and ten dollars to fill the
Speaker 1: tank suddenly went up to two hundred plus and it hurt.
Speaker 1: It really really hurt. And perhaps unsurprisingly, electric vehicles have
Speaker 1: seen a big spike this year, and with them, there's
Speaker 1: also a lot of talk about the use of novated
Speaker 1: leases in order to get your hands on an EV.
Speaker 1: My confession is that I've never really understood car leases.
Speaker 1: It's always been a little bit kind of confusing. I
Speaker 1: get the concept I've tried to look into them, thinking
Speaker 1: that it might be a better way for me to
Speaker 1: do it, that I can use it to get a
Speaker 1: new car. I've never actually done it in the end,
Speaker 1: because I can't quite figure out if it's good for
Speaker 1: my budget, if I'm going to get the if I'm
Speaker 1: going to drive enough to make it worthwhile, all of
Speaker 1: these bits and pieces. So today that's what we're going
Speaker 1: to work our way through to figure out whether a
Speaker 1: novated lease is a good idea to get you behind
Speaker 1: the wheel of an EV.
Speaker 2: And of a fuel efficient EV. Yeah.
Speaker 1: Yeah, indeed, Okay, to help save money. Correct, let's start
Speaker 1: at the very beginning. What is a lease?
Speaker 2: So a novated lease is a three way agreement between yourself,
Speaker 2: your employer, and the leasing company. And it's a car
Speaker 2: financing agreement. And your employer makes payments on your behalf,
Speaker 2: which is deducted from your salary, a little bit like
Speaker 2: salary sacrificing. It's taken with pre tax dollars, but it's
Speaker 2: used to pay for the car.
Speaker 1: Okay, that is important that it comes out of your
Speaker 1: pre tax.
Speaker 2: Retax, so you're taking less in your net pay in
Speaker 2: order to package the car.
Speaker 1: In okay, and so how does that actually work? Then
Speaker 1: you make the deal first, or you go to it.
Speaker 1: There are companies that run novated leasing.
Speaker 2: The your employer will normally have a novated company that
Speaker 2: has a list of cars, and you select a car
Speaker 2: from their list available. And that's also really important because
Speaker 2: they may not necessarily have the car that you really
Speaker 2: want on that list, and then the lease company purchases it,
Speaker 2: but you then rent it over a fixed term, which
Speaker 2: is typically between sort of anywhere between two to five years,
Speaker 2: but I believe four years is the sort of sweet
Speaker 2: spot that most people tend to pick. But the thing
Speaker 2: with a novated lease is you're not just packaging the car,
Speaker 2: like the cost of the car, you're also including in
Speaker 2: it the running costs, so the fuel, the electricity, the redgio,
Speaker 2: the insurance, you know, the maintenance like ties. So it's
Speaker 2: all combined very neatly into one regular payment, but you
Speaker 2: more often than not have a balloon, or we call
Speaker 2: it residual payment at the end. So for example, you
Speaker 2: might buy a car for say sixty thousand, but the
Speaker 2: residual amount maybe say twenty thousand dollars after year four,
Speaker 2: year five, depending on the terms and conditions.
Speaker 1: Okay, In terms then of the costs you are going
Speaker 1: to be paying weekly, how much we how much are
Speaker 1: we talking? What what?
Speaker 2: What is in the cost of the car?
Speaker 1: Okay? All right, well, can we break it down then
Speaker 1: slightly a little bit more. What is included in this lease?
Speaker 2: So obviously the least repayments, then of course interest because
Speaker 2: these nobed lease companies I need to make money. Insurance,
Speaker 2: then regio maintenance, and of course a need sort of
Speaker 2: management fees that the no ed lease company may charge.
Speaker 2: And it does feel very simple, but it doesn't necessarily
Speaker 2: mean it's cheap.
Speaker 1: What about fuel, yes, assuming that it's sorry, assuming that
Speaker 1: this is not just a least for an ev yeah,
Speaker 1: and so all of the running.
Speaker 2: Costs, so you'd have to know roughly how much you
Speaker 2: how much driving you do per year, so they can
Speaker 2: work out the right amount of obviously wear and tear
Speaker 2: on the car, how much fuel, how often you need
Speaker 2: to get it serviced, and you know things like tires
Speaker 2: being replaced with brake pads.
Speaker 1: Okay, and then you are paying this weekly or fortnightly
Speaker 1: or monthly or whatever it is coming out of your
Speaker 1: pre tax pay. And then at the end of the
Speaker 1: least period. There is a balloon payment that you have
Speaker 1: to pay if you want to keep the car, but
Speaker 1: you don't have to keep the.
Speaker 2: Car, so no the balloon payment. You've got a few
Speaker 2: different options, and again it comes down to the fine
Speaker 2: pern and getting some advice. So some people will actually
Speaker 2: roll that over and take out a new lease on
Speaker 2: that balloon payment. Some people will hand the car back
Speaker 2: and pay out the difference. Some people will sell it.
Speaker 2: I've even seen a couple, not often, but there were
Speaker 2: situations where people would sell it actually end up with
Speaker 2: some money. But a lot of people tend to roll
Speaker 2: it forward, they'll upgrade the car.
Speaker 1: Okay, all right, Why are people so interested then in
Speaker 1: novated leases for evs at the moment it goes And
Speaker 1: it's a leading question here because I know that it
Speaker 1: does go beyond just the fact that there is demand
Speaker 1: for evs because petrol prices are so high. There are
Speaker 1: some other incentives.
Speaker 2: Well, the government incentives are probably the biggest one here.
Speaker 2: So in Australia, many evs that like or on a
Speaker 2: notivated lease are FBT free, so Fringe Benefits tax is
Speaker 2: not charged when you take a notvated lease on an
Speaker 2: EV and this can significantly reduce the cost because you're
Speaker 2: not having to pay fringe benefits tax, which is which
Speaker 2: is huge. Also, you know, obviously the lower running costs,
Speaker 2: no petrol, less maintenance. There's obviously, again not everyone agrees
Speaker 2: with us the environmental appeal, and you know, it looks like,
Speaker 2: you know, you are being very responsible and respectful to
Speaker 2: the planet. And you know, I've never seen so many
Speaker 2: smug EV vehicle drivers. Like even one of my girlfriends said,
Speaker 2: I've never been proud of the fact I bought a
Speaker 2: Tesla four years ago, Like I'd just sit down that
Speaker 2: freeway feeling really smug.
Speaker 1: Really smug. I mean, but that's also been that's been
Speaker 1: the case since the Prius first kind of drove around
Speaker 1: what twenty years ago or something. There's always been this
Speaker 1: slide kind of look in their eyes, going, I'm doing
Speaker 1: more for the planet than you are.
Speaker 2: Tax and centerves definitely can make something look a lot
Speaker 2: more attractive, but they don't actually, they don't necessarily make
Speaker 2: it the best option for you.
Speaker 1: Who is it suited to Because I'm thinking about me
Speaker 1: and I'm thinking about how much I drive, which is
Speaker 1: not actually that much anymore. I do a lot of
Speaker 1: working from home when I'm coming in here into the
Speaker 1: studio or jump on the train. Really, we're probably kind
Speaker 1: of ten thousand k's per year at most.
Speaker 2: Yeah, I'm probably not too like I would be the same.
Speaker 2: I think I ever worked out between twelve to fifteen
Speaker 2: thousand a year.
Speaker 1: Yeah. Yeah, And so is it suited then to people
Speaker 1: who are doing more? They're doing kind of twenty thirty forty,
Speaker 1: they're on the road all the time for work, they're
Speaker 1: traveling around a lot more. Who is it suited to.
Speaker 2: The most important thing to know and understand what this
Speaker 2: novated lease is is you've got to have stable employment,
Speaker 2: you know, salary obviously to make the repayments. But if
Speaker 2: you leave your employer or you're made redundant, this then
Speaker 2: potentially terminates the novator lease, which means you lose the
Speaker 2: tax benefits and you've also got to pay out the car.
Speaker 2: So if you don't have money set aside for that payout,
Speaker 2: you could put yourself under serious pressure. So if you're
Speaker 2: going to do something like this, you've got to know
Speaker 2: you're going to be staying put with that particular employer
Speaker 2: for quite some time. Then of course, you know, and
Speaker 2: this is the bit of the I guess the I
Speaker 2: wouldn't say polarizing. But the controversial issue with these tax
Speaker 2: incentives is that, you know, a lot of people argue
Speaker 2: that these tax and centers are only for people in
Speaker 2: the top mondal tax rate because they're the ones that
Speaker 2: benefit the most from being fringe benefits tax free. So
Speaker 2: you could say, well, you know, they're the ones that
Speaker 2: will benefit first and foremost. Then of course, people who
Speaker 2: you know, value convenience because it is neatly packaged in
Speaker 2: one repayment rather than having you know, your CTP, your
Speaker 2: ohe CTP third party, but your comprehensive cover the petrol,
Speaker 2: you know, the maintenance. Everything is grouped in the one
Speaker 2: of payments of them, and it makes a lot easier
Speaker 2: to manage your budget, I will admit. And people obviously
Speaker 2: who do need a car, and a reasonably new ish car,
Speaker 2: you know, that's something that this may suit people. For example,
Speaker 2: not that I necessarily agree with this, but you'll see
Speaker 2: a lot of real estate agents tend to drive a
Speaker 2: new car. They don't. You don't tend to see them
Speaker 2: driving around in say a Karl like mine, it's like
Speaker 2: nine years old. Generally speaking, I know it's a huge
Speaker 2: assumption I'm making it. But people who do want because
Speaker 2: it's part of what they do, have a newish, smart
Speaker 2: looking car that with the latest technology. Okay, And it
Speaker 2: was of course, like having predictable expenses, like a good budget.
Speaker 2: You know that they're very they've got the cash photos
Speaker 2: to service this.
Speaker 1: All right, then who should avoid it? And based on
Speaker 1: just what you've said there, if you have unstable employment,
Speaker 1: that's one.
Speaker 2: What else people with a tight cash flow. In the
Speaker 2: other day, someone actually who I know through work was saying,
Speaker 2: you know, should I should I be buying a new car?
Speaker 2: But I knew that they were on a really tight budget
Speaker 2: and had a lot of other things going And I
Speaker 2: was like, absolutely not. This is the last thing you
Speaker 2: should think on your list right now to because we'll
Speaker 2: think about it. You've got to find the repayment. If
Speaker 2: you don't have that money, you know, say two hundred
Speaker 2: and fifty dollars a week, or five hundred dollars a month,
Speaker 2: or seven hundreds a month, whatever it may be, you
Speaker 2: coult to make sure you can service that comfortably.
Speaker 1: So you treat it. You have to look at it
Speaker 1: basically just as as a.
Speaker 2: Loan exactly and didn't think of it as as well
Speaker 2: as a form of like a responsibility. It's a repayment
Speaker 2: to a certain degree.
Speaker 1: Okay, that makes sense.
Speaker 2: But also a lot of people don't realize this will
Speaker 2: impact your credit score, so it will then impact your
Speaker 2: ability to borrow and how much you can borrow. So
Speaker 2: if someone is thinking of you know, looking at say
Speaker 2: moving home and upgrading the home, or perhaps looking at
Speaker 2: a debt recycling strategy, or perhaps looking at buying an
Speaker 2: investment properties planning to take a new loan out, you know,
Speaker 2: a fifty thousand dollars ev on an ovated lease can
Speaker 2: potentially reduce your borrowing capacity by up to one hundred
Speaker 2: and fifty thousand dollars. Now, yes, again we always get
Speaker 2: a mortgage broker and speak to the mortgage broker before
Speaker 2: you go and do this, But that's something you don't
Speaker 2: want to discover when you go to borrow money to
Speaker 2: buy property or you know, to look at debt recycling
Speaker 2: and originally you're planning on doing this at this price point,
Speaker 2: but suddenly your budget gets cut down significantly because of
Speaker 2: this one decision you made three months ago, six months ago,
Speaker 2: a year ago that you're kind of married to for
Speaker 2: the next two to five years.
Speaker 1: Okay, I want to dig a little bit deeper into that,
Speaker 1: because I think it's probably something that a lot of
Speaker 1: people wouldn't be aware of.
Speaker 2: Yeah, a lot of people don't really understand the fine
Speaker 2: print behind these agreements. And this is the problem. It is.
Speaker 2: It's like you're getting something for nothing. You're getting a
Speaker 2: fifty thousand dollar EVY and you're thinking you're doing all
Speaker 2: the responsible things because it's going to save your budget,
Speaker 2: save your cash flow. But there are a lot of consequences.
Speaker 1: Okay, well, we're going to go into a few more
Speaker 1: of those in a moment. Quick break back in a
Speaker 1: sec kin a very simple question today, should you lease
Speaker 1: an ev There's a lot more to this, as we've
Speaker 1: discovered novated leases. They do look good on the surface,
Speaker 1: having kind of one payment per month or a week
Speaker 1: or fortnite or whatever it is coming out of your
Speaker 1: pre tax pay and that covers kind of the cost
Speaker 1: of the car itself and the wear and tear, the maintenance,
Speaker 1: the red oh, the insurance, all of that. It does
Speaker 1: feel very simple, it feels very clean, but there's a
Speaker 1: lot more to it under the surface. As we've now
Speaker 1: discovered risks. The big one that you mentioned before was
Speaker 1: the risk that if your job changes, if you if.
Speaker 2: You lose your job, gett made redundant.
Speaker 1: That you are responsible for, you'll have to make a
Speaker 1: decision whether it's ending the lease yep, and having to
Speaker 1: pay potentially significant fees there the borrowing capacity. That is
Speaker 1: something that I hadn't kind of processed, and you don't
Speaker 1: take that into account until you try and get a
Speaker 1: credit product of some kind, whether it's a loan, you're
Speaker 1: getting credit card or something that all of a sudden
Speaker 1: that they are factoring in all of these liabilities responsibilities. Yeah, yeah,
Speaker 1: and not just the fact that if you've got a
Speaker 1: credit card that's got to say a five thousand dollars
Speaker 1: limit or so that and you say, on it's fine,
Speaker 1: I keep it paid down to zero. It's always at zero. No, no, no,
Speaker 1: that doesn't matter the fact that you actually have this
Speaker 1: five thousand dollars limit available potential debt there. That's going
Speaker 1: to count. Again, and in the same way that having
Speaker 1: a lease on an EV or any vehicle is also
Speaker 1: going to count.
Speaker 2: Absolutely so, particularly people who are looking to refinance as well,
Speaker 2: you know, not necessarily taking on new debt, but refinancing.
Speaker 2: You want to check this with your mortgage broker before
Speaker 2: you go and do this.
Speaker 1: What are the other risks here? Is that potentially, yeah,
Speaker 1: not going to get the mileage out of it, and
Speaker 1: therefore you're actually paying more than the value of what
Speaker 1: you're getting.
Speaker 2: Yes, of course, but then there are actually bigger ones,
Speaker 2: more serious ones. So you know, with the fringe benefit tax,
Speaker 2: I know, well, this is why I'm so glad we're
Speaker 2: doing this episode, because normally I would er away from
Speaker 2: this topic being a depreciating asset that provides, you know,
Speaker 2: for a little benefit other than a lifestyle one. But
Speaker 2: you know, you're playing with your adjustable taxable income. So
Speaker 2: your employer, because you're now packaging a car, can only
Speaker 2: pay super the twelve percent super guarantee on your reduced salary.
Speaker 2: So say I'm earning fifty say I'm earning, say fifty
Speaker 2: thousand dollar a year, and I go and package a
Speaker 2: ten thousand dollars a year car. So ten thousand dollars
Speaker 2: are now being taxed at forty thousand dollars a year.
Speaker 2: My employer only needs to pay twelve percent on the
Speaker 2: forty thousand not on the fifty thousand, So I'm actually
Speaker 2: now jeopardizing what's going into my superannuation and therefore there
Speaker 2: is a consequence or repercussion to my final superannuation account balance.
Speaker 1: Did you know that I did not kill now? Well,
Speaker 1: to be fair, I also haven't tried to take out one. Now,
Speaker 1: that's a good reason.
Speaker 2: And same issue could increase your hex s debts as well,
Speaker 2: not increase your head stets, right, increase your HEX repayments,
Speaker 2: the minimum repayments and also if you qualify for any
Speaker 2: sort of subsidies like childcare, can also impact that as well.
Speaker 1: Okay, all right, the end of the lease. We talked
Speaker 1: before about the balloon payment, and so you need to
Speaker 1: be prepared for that as.
Speaker 2: Well, right, Yes, So you would need to factor into
Speaker 2: your budget to have like a regular savings plan over
Speaker 2: the course of your agreed term so that when and
Speaker 2: they would give you a figure as to what the
Speaker 2: balloon payment would be, so you know in advance, you know,
Speaker 2: I'm going to have a twenty thousand dollars balloon payment
Speaker 2: in twenty twenty nine, and you wouldn't want to save
Speaker 2: up for that so that when that comes you can
Speaker 2: pay the pay off the car, the balloon payment, and
Speaker 2: then obviously you get to keep the car. But as
Speaker 2: I said, some people like to refinance this. They'll go
Speaker 2: to take out the remaining balloon and turn it into
Speaker 2: another lease or a lot of people get caught into
Speaker 2: this trap I'm going to say, where they end up
Speaker 2: just trading the car and getting the latest model.
Speaker 1: A balloon. Payments subject to inflation.
Speaker 2: A good question. I think it obviously would come down
Speaker 2: to the terms and conditions and the fine print. But
Speaker 2: I believe it's fixed in the contract. But they've already
Speaker 2: factored in that anyway, so they're already charging you interest
Speaker 2: that would take into consideration.
Speaker 1: So balloon inflation.
Speaker 2: It was just a joke, Okay, I didn't Sorry that
Speaker 2: went over my head, and I'm hoping the listeners went
Speaker 2: over their head too, so that.
Speaker 1: They should appreciate that that was comedy gold here and
Speaker 1: I'm just not appreciated. Do you think people fully understand
Speaker 1: what they are committing to when agreeing to an ovator?
Speaker 1: At least certainly there would be some But there's a
Speaker 1: lot more to it.
Speaker 2: There is so much more. There's so much the devil
Speaker 2: in the detail. And I think also with everything. There's
Speaker 2: so much talk of petrol prices. You know, it's almost
Speaker 2: like the new property topic that people talk about. And
Speaker 2: I think a lot of people are. You know what
Speaker 2: we've seen in the headlines, you know, this knee jerk
Speaker 2: reaction of people getting rid of their cars, you know,
Speaker 2: going and buying an EV. A lot of people are
Speaker 2: now on wait lists for EV. So there is there
Speaker 2: has been Potentially when you see these figures, it would
Speaker 2: potentially indicate there's been an emotional rational reaction to the
Speaker 2: petrol prices and shifting towards EV. I'm not judging that
Speaker 2: at all, but perhaps some people need to do things differently.
Speaker 2: And ironically, I'm in a similar situation too. I have
Speaker 2: a car. I own it outright, it's nine years old,
Speaker 2: and it's getting towards the point where time's like, I
Speaker 2: think we need to change. But now I'm wondering. And
Speaker 2: I never would have thought about getting an EV because
Speaker 2: I have got three kids, I need you got three
Speaker 2: big dogs, I need a big car. But now I'm thinking, well, no,
Speaker 2: I don't need a big car because that's going to
Speaker 2: be so expensive. Perhaps, you know, I need to look
Speaker 2: at my lifestyle and maybe you know, hang in a
Speaker 2: bit longer where all three kids are out of booster
Speaker 2: seats and car seats which take which require a big
Speaker 2: car and make it last a little bit longer, and
Speaker 2: you know, not necessarily by a new car, just yet
Speaker 2: try and hold out and also then see what happens
Speaker 2: to fuel prices as well. They may come back a bit.
Speaker 2: So I think it's one that you need to enter
Speaker 2: in very very carefully, looking at all your options, doing
Speaker 2: your research, and you know, even looking taking time to
Speaker 2: look at the actual car, because there's also lots of
Speaker 2: information coming up about how long these cars actually really
Speaker 2: do last, how many kilometers they state, versus how much
Speaker 2: the evidence is showing.
Speaker 1: And we did remember we had Trent Nikolic in the
Speaker 1: studio last year when we were talking about.
Speaker 2: What to look for, said to me, don't get an
Speaker 2: ev with what my lifestyle is actually about. But you know,
Speaker 2: I think you just like, hold up, do your research,
Speaker 2: ask all the question, look at the fine print, and
Speaker 2: really question whether it's the right time what you really want.
Speaker 2: And perhaps so there are other ways to help bring
Speaker 2: down your petrol prices rather than just rush out and
Speaker 2: buy a new ivy.
Speaker 1: Okay, if people want more information from you and want
Speaker 1: to see where you what you eventually decide to do
Speaker 1: with your car.
Speaker 2: Best place to get in contact with me is at
Speaker 2: Sugar Mama TV on Instagram.
Speaker 1: And you can hear me every day with Sean Aylmer
Speaker 1: on Fear and Greed business news. You can use thank
Speaker 1: you for listening to how do they afford that? Remember
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Speaker 1: is a link for that one in the show notes today.
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Speaker 1: again next week