Forums / Getting Technical / Finance / car leasing Vs buying it outright , impact on borrowing capacity.

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  • Profile photo of Coogee126Coogee126
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    @coogee126
    Join Date: 2009
    Post Count: 51

    hi there buddies,

    after a long battle , I m deciding to change a 10 yrs old japanese car to a newer model European car.

    we come across car leasing through work, and was told we can package the car and all the car related expenses into our gross salary etc.. I think this is a great way to reserve the big chunky amount of money ( I was going to buy a 2nd hand car say around 55k to 60k range, and pay cash without a car loan).

    the otherwise saved chunky amount of money , of course I m going to use it to buy income producing IPs instead.

    now sitting in a property seminar the other day, the loan experts said car leasing can reduce your borrowing capaicty substantially. It is not something you can take easily when you have future invesment plans in head, which makes me wonder if car leasing really worthwhile doing compare with the whatever loss of borrowing capacity it brings.

    I think a extra 55k worth of cash will give me the buying power of roughly 220k ? could car leasing packaging a 55k car resulting a loss of borrowing capacity of 220k , if everthing else being equal?

    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
    Post Count: 400

    It sounds like you are trying to salary sacrifice the car. This has its own advantages and pitfalls, and you should really see an accountant to make sure it is suitable for you.

    As for the borrowing capacity, this all depends on how much your repayments are for the lease? That is dependent on the lease term, interest rate, etc. What that does is reduces your pre and post tax salary, and as a result reduces your borrowing capacity. It isn’t out of the realms of possibility that it may reduce your borrowing capacity by $220K, but it may be more, and it may be less. You really won’t know until you had all the numbers.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of Corey BattCorey Batt
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    @cjaysa
    Join Date: 2012
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    The car lease will drop your repayments significantly. If you are looking to make a purchase/grow your portfolio over the next few years the lease will act as an anchor unless you’ve got sufficient income to absorb it. Best to speak to a savvy broker who can talk to you about your specific situation, and how a lease/cash purchase will play into your borrowing capacity. :)

    Corey Batt | Precision Funding
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    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of JimmyKJimmyK
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    @jimmyk
    Join Date: 2014
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    For myself personally, a salary package of a vehicle reduced my borrowing capacity by around $150k. Luckily, my package finishes at the end of 2015.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    You must be rich?

    $55k on a car is crazy – what will it be worth in 5 years?

    If you purchased $55k worth of vangard index fund what would it be worth in 5 years, and how much income would you have received?

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Coogee126Coogee126
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    @coogee126
    Join Date: 2009
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    Jimmy, 150k is a lot of money to be lost due to the lease.. you must have a top of the range car lease. it’s better to pay cash.. i suppose..

    Profile photo of Coogee126Coogee126
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    @coogee126
    Join Date: 2009
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    yes.. I knw what you mean. but i have been frugal for years and i work hard be where i am today.. I read warren buffet and remember him saying, money is your seed need et cetera… I do love money but not have the will power like warren. so I guess it’s time to enjoy a little fruit of my hard work….i think the excitement of driving a nice car is at par with the lost dividend or potential cap growth or whatever.. compound term, maybe i lose more but i would be dead by then.. Life is short and you gotta enjoy when you can ( sensibly of cos ) .. Sorry, I am a vain gal ! :)))

    Profile photo of Colin RiceColin Rice
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    @fms
    Join Date: 2011
    Post Count: 338

    To be blunt, DONT DO IT. I have refinanced a few of these recently due to severely hampering borrowing capacity.

    Last one went from $1300 cash out the door per month to just over $100 per month.

    I suspect a very clever sales pitch appealing to human emotion is behind these nasty novated leases.

    Colin Rice | CDR Finance
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
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    I suspect a very clever sales pitch appealing to human emotion is behind these nasty novated leases.

    oh man – tell me about it.

    Being based in Canberra – I see so many APS staff who have salary sacrificed expensive cars that kill their borrowing capacity.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of hydramaxhydramax
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    @hydramax
    Join Date: 2009
    Post Count: 47

    If you were to concentrate on buying your IP after a short while you would soon see the advantages, and how quickly you can create wealth by valuing and respecting the $$$. I know it’s harsh but once you reach that point you will soon forget about spending big on a motor car. Any vehicle lease would put a large dent in your serviceability. I know your only young for a short time, but get on he property ladder and kiss the fancy car goodbye.

    Good Luck
    Hydramax

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    I have just purchased a new car at a lot more than 60K but totally agree with others that lease repayments will certainly significantly reduce your borrowing capacity in the future.

    If you are unable to claim any element of a Tax deduction for the interest or repayments i would think very carefully before proceeding.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of BuyersAgentBuyersAgent
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    @knightm
    Join Date: 2005
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    I get that you want a nice car – and if you are asking the questions here you obviously want to find the balance and preserve your borrowing capacity for IP’s too. Well done for asking BEFORE committing to the shiny new expense.

    If you really want to salary package – here is what I once did to try and get the balance right (nice car but not overspend).

    The leasing rules say you need to have cars at say 7 yrs old at end of lease. (they vary a bit but give or take)

    This means you can find a second hand car and run it through the system. It doesn’t have to be that old.

    I once bought a 4 wheel drive. $58k new, but I purchased ex lease 18-20 months old for 21k. Yep thats some depreciation. That is why I don’t like new cars.
    Then I sold the 21k car back to a leasing company (getting my capital back) and salary packaged it for the fortnightly pre tax payment.

    The payment will still effect your borrowing capacity but not as much as the debt amount is much lower.

    Alternatively you could just go get it financed on the lowest interest rate and longest terms you can find.

    Alternatively you can buy more properties, set up multiple offset/redraw accounts off the equity (talk to your broker and accountant to avoid screwing it up) and use the equity to buy a car. You will be servicing a lower rate.

    Alternatively just buy the 21k car for cash.

    Alternatively ride a bike.

    Aternatively ….

    BuyersAgent | Precium
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    South Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au

    Profile photo of aussieguy2000aussieguy2000
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    @aussieguy2000
    Join Date: 2010
    Post Count: 81

    Why not consider buying first and then getting the car lease after it, it is much easier to get the car lease, and if they won’t give it to you based on your capacity to borrow, you probably shouldn’t bother with it.

    As the average IP is negatively geared from the start, the “savings” from a lease come from the savings on tax, whenever I EVER calculate salary sacrifice/packaging options for their savings I always reduce my salary to what it would be after my negative gearing and work deductions. If were to earn 85k and have 10k worth of tax deductions (all types not just NG) it would drop you to a lower tax bracket, this should be the savings your investments are making you not leases/salary packaging. The person spruiking the car lease will calculate the savings based on the higher tax bracket, when in fact you are not in that tax bracket after your deductions, so the savings he sells you could actually be a negative, not a positive, and remember at the end of the lease you don’t own the car, you still have to pay for it (usually at around the current market value -usually an “agreed” – read: set by the lessor” value at the start of the lease) if you want to keep it, or roll over to a new wallet haemorrhaging lease on another car.

    If you want to estimate your “borrowing power” there are plenty of calculators you can use, work out how much you can borrow without the lease and then do a calculation with the lease, try to find one that is more than just 3 or 4 boxes to fill in, a detailed one may have separate areas to enter car/other loans and repayments rather than a simple calculator. One final piece of advice is I wouldn’t spend more than half your yearly salary on a car (lease or otherwise) if you can avoid it, preferably even less than half of your yearly net income after tax.

    • This reply was modified 4 years, 9 months ago by Profile photo of aussieguy2000 aussieguy2000.
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