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What happens if a novated lease ends early - redundancy, job transfer, vehicle write-off etc

When a novated lease ends early — for example due to resignation, redundancy, or employer change — the novation terminates.

It may also arise following a vehicle write-off in a car accident, where insurance proceeds are insufficient or a replacement vehicle is not provided, resulting in the lease being effectively terminated through an accelerated payout.

Without adequate risk mitigation, such a transition may turn a novated lease from financially attractive into financially unfavourable.

This page is a high-level overview of the consequences of early termination; numerical examples are discussed in the “How bad can early termination get?” page. Risk mitigation strategies are discussed in a separate article.

Common situations where early termination occurs

Causes may include:

  • job loss or redundancy,
  • changing employers who do not support novated leases,
  • transition to unpaid or extended leave,
  • vehicle write-off, or
  • death.

Many of these are normal life events that happen to a significant proportion of people, therefore it is worth understanding and preparing for.

What “early termination” involves

Early termination usually requires one of the following:

  • paying out the remaining lease balance and residual in cash, or
  • refinancing the remaining balance (and residual) into a personal loan or lease.

There is no mechanism by which early termination causes the residual or remaining lease to be waived.

Note that the lease payout:

  • is now payable with post-tax dollars rather than pre-tax dollars,
  • will attract an additional 10% GST, which is normally effectively waived during an active novated lease, and
  • in some cases, may include an “early termination rate”, i.e. an additional penalty.

The residual becomes immediately relevant

As discussed in the residual value section of this guide, residual values are:

  • ATO-mandated,
  • not optional,
  • not linked to market value.

When a lease ends early, the residual is immediately payable alongside the remaining lease.

Why does early termination make a novated lease expensive?

Under the hood, a novated lease usually contains several intrinsically expensive components:

  • the vehicle is financed at a higher-than-typical car loan effective interest rate, sometimes in the double digits (e.g. ~11%)
  • there is often an ongoing monthly administration or management fee

Despite this, a novated lease (particularly the FBT-exempt EV variety) can still be cheaper than cash or a conventional loan because of several structural advantages:

  • a significant portion of the lease is funded with pre-tax income
  • the upfront GST on the vehicle is waived (up to the relevant cap)
  • GST on lease payments is often effectively waived
  • additional savings are achieved by funding running costs with pre-tax dollars

These NL-specific advantages are what make the arrangement work.

When a novated lease is terminated early, however, these advantages disappear, while the underlying expensive financing remains.

Once novation ceases:

  • income tax savings stop
  • GST concessions stop
  • running cost concessions stop

What remains is the raw finance obligation, now without the tax offsets that previously made it palatable.

In some circumstances — particularly very early termination — the total amount paid (or payable) for the vehicle can end up higher than if the car had been purchased outright with cash at the beginning.

“What happened to the principal I’ve already paid down?”

This is a common point of confusion.

In a financial lease, there is no principal in the loan sense.

Although novated leases are often discussed using terms like “effective interest rate”, this is a reverse-engineered concept:

If we pretend this lease were a loan, what interest rate would produce an amortisation schedule that starts at the financed amount and ends at the residual and with identical repayment figure?

That does not mean the lease actually has a principal balance being paid down in the same way as a loan.

In reality:

  • there is no loan principal
  • there is no amortisation schedule in the accounting sense
  • there is only a contracted series of payments plus a residual

At early termination, what you owe is simply:

everything that remains under the contract,
now without the tax concessions that previously reduced the effective cost.

A useful analogy is exiting a property lease early:

  • you do not argue that you have “paid down principal”
  • you are still liable for what remains under the agreement

This is precisely why early termination can sometimes result in a worse overall outcome than a car loan or cash purchase, even if the novated lease looked attractive while everything was running smoothly.

Key takeaway

If you remember nothing else:

Early termination could turn a novated lease from a good deal into a bad one.

Understanding that upfront turns early termination from a nasty shock into a quantifiable and mitigable risk.

Optional Support

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