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You don’t have to sell your car above the Residual value

There is a common myth in novated lease discussions:

“A novated lease is only worth it if you can sell the car for more than the residual value.”

This rule of thumb has become so widespread that many people use it as the primary — or even sole — test of whether their lease is worthwhile. They look at their 1/2/3/4/5‑year residual, estimate the expected market value at the end, and treat the difference as a shortcut for determining whether they are “making a profit.”

This way of evaluating a novated lease is simply incorrect.

How the calculator actually evaluates a lease

If you look at the novated lease calculator, the analysis is broken down into three components:

  • Cashflow – How much you pay out of pocket over the lease period, including the residual paid at the end to own the car outright.
  • Liability – How the financing method affects home loan interest (or other forms of opportunity cost).
  • Asset – The value of the car at the end of the lease.

When comparing two financing methods (e.g. novated lease vs cash purchase, or new car via NL vs keeping your current car), all three categories are placed side‑by‑side. The difference across these categories determines the overall change in your financial position — in other words, the net worth difference.

Once you frame the comparison this way, the “just compare residual to market value” shortcut immediately falls apart.

Why the residual vs market value comparison fails

The residual value is determined at the start of the lease. It is based on:

Once the lease begins, the residual is fixed.

The market value at the end of the lease, on the other hand, is simply the value of the car as an asset.

Here is the crucial point:

  • Whether you bought the car with cash or via novated lease, you can sell it for the same market price at the end. The funding method does not change the car’s resale value.

When comparing novated lease vs cash purchase of the same car, the end asset value is identical in both scenarios. It therefore cancels out in the comparison — which is why the asset value does not appear in the summary comparison view of the calculator.

If you are comparing new car via NL vs keeping your current car, then yes — the end asset values differ. But that difference depends only on the relative market values of the two cars at the same future time point. It has nothing to do with how that market value compares to the ATO residual.

The psychological anchor

Why does this myth persist?

Most likely because of short‑term cash psychology.

Consider this situation:

You pay out a $23,235 residual to own the car. You immediately sell it for $21,000. You experience a $2,235 shortfall in that moment.

That shortfall is real and painful.

However, this focuses only on the cash movement at the end of the lease. It ignores:

  • The overall cashflow difference across the lease
  • The overall home loan interest saved (or opportunity cost avoided)
  • And other associated financial impacts e.g. impact on government subsidy, superannuation contribution etc.

Novated lease net savings (or losses) are determined over the full lifecycle of the arrangement — not merely the short window around payout and resale.

Example using my own lease

Using my own lease (the default figures in the calculator):

  • Over 5 years, the novated lease costs $46,608 less than purchasing the car outright.
  • The calculator assumes a 5‑year market value of roughly 40% of the original price (~$33,000), which is well above the $23,235 residual.

Now here is the critical test:

If you manually change the assumed market value to $21,000 instead of $33,000, the overall 5‑year saving compared to cash remains unchanged.

Similarly, if the car miraculously sells for $60,000 after 5 years, the overall 5‑year saving compared to cash also remains unchanged.

Why?

Because when comparing novated lease vs cash purchase of the same car, the asset value at year 5 cancels out in both pathways. The resale value does not depend on how the car was funded.

Therefore, the relationship between market value and residual value does not determine whether the novated lease “made money.”

But isn’t Toyota considered better for leasing because of resale value?

One might argue: if you lease a Toyota Camry and a similarly priced European car, and the Toyota holds its value better and sells above residual, doesn’t that make Toyota inherently “better” for leasing?

At first glance, this sounds compelling.

However:

  • Toyota’s stronger resale value is simply a function of its higher market value as a used car.
  • That advantage exists regardless of how the car was financed - novated lease, loan or cash.
  • It has nothing to do with where the market value sits relative to the residual value.

Imagine, hypothetically, that the ATO required every lessee to add a flat $20,000 to their residual payout. Both cars would now sit below their newly inflated residual values. Yet the Toyota would still be worth exactly the same amount more than the European car as before.

The relative resale strength remains unchanged. The residual comparison is irrelevant.

The key takeaway

It is incorrect to evaluate a novated lease purely by comparing the end‑of‑lease market value with the residual payout.

When comparing novated lease against cash or loan, the market value’s position relative to its residual has zero bearing on the amount you ultimately save (or lose).

The correct evaluation must consider the full financial picture — cashflow, liability, and asset value over the entire lease.

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