You’ve probably heard the term ‘balloon payment’ before and wondered what it has to do with salary packaging a car. In the world of novated leases, it’s just another way of saying residual value.
The residual value is a final payment due at the end of your novated lease.
It’s not some random figure either. The residual is calculated as a set percentage of the car’s original purchase price, following ATO guidelines, to make sure the lease structure is fair and compliant.
How do novated lease residual values work?
Your regular novated lease payments cover the car itself plus running costs like fuel, servicing and registration – but not the residual.
That amount is set aside until the lease ends, when you’ll need to pay it in full. Most people either pay it outright or sell/trade in the car and use the proceeds to cover it.
A handy rule of thumb: the shorter the lease, the higher the residual; the longer the lease, the lower it will be.
ATO minimum residual values for 2025
Residual value example…
Let’s say you choose a Kia Sportage GT-Line (petrol) priced at $60,000 on a 5-year novated lease. With a residual value of 28.13%, the balloon payment at the end would be:
- $60,000 x 28.13% = $16,878
So, if you plan on keeping the car at the end of the lease, you’ll need to budget for this amount over five years. That works out to putting aside roughly $65 a week to cover the balloon payment.
Why are novated lease residuals a thing?
The ATO sets residual guidelines to make sure novated leases don’t blur into car loans.
Think of it this way: with a loan, you’re paying off the full cost of the car until it’s 100% yours. With a lease, you’re more like renting the car for a set period, with the option to buy it at the end.
The residual ensures there’s still value left in the car when the lease wraps up, which usually lines up with its expected market price. This keeps leasing arrangements legit and stops them being used as a backdoor way to purchase a car through salary packaging.
Entering into a finance agreement with a balloon payment is definitely something to weigh up, and for some, it can feel like a downside of a novated lease. The good news? You’ve got options.
Do you have to pay out your residual at the end of a novated lease?
You can choose to pay the residual to own the car outright, pay it and roll into a new lease, or simply renew the lease with the same car. Each option comes with its own pros and cons, and what’s best really depends on your situation.
Keep in mind, the residual is usually a pretty chunky sum, and it can feel like a shock if you haven’t factored it in. That’s why it pays to plan ahead and think about how you’ll handle the balloon payment before you even sign the lease.
