When preparing to buy a home, many borrowers focus on saving a deposit, improving their credit score and reducing unnecessary debt. However, one area that is often overlooked is how existing vehicle finance is assessed by mortgage lenders.
A novated lease can be a tax-effective way to finance a vehicle while you are employed, but when it comes time to apply for a home loan, it may affect your borrowing capacity differently than you expect.
In some situations, refinancing a novated lease into a standard personal car loan can help simplify your financial commitments and improve how your income and expenses are assessed. The right solution will always depend on your individual circumstances and should be considered alongside advice from your mortgage broker or financial adviser.
A novated lease is structured differently from a traditional car loan.
Rather than simply making loan repayments, a novated lease often includes vehicle running costs such as fuel, servicing, registration, insurance and maintenance within one salary-packaged arrangement.
When assessing a home loan application, some mortgage lenders may treat these packaged costs conservatively because they represent an ongoing financial commitment.
This can reduce the amount a lender is prepared to lend, even if some of those expenses are costs you would continue to pay regardless of how the vehicle is financed.
Refinancing the vehicle into a standard personal car loan may simplify the way your financial commitments are presented to a mortgage lender.
Instead of assessing a salary-packaged novated lease with bundled operating costs, the lender may only need to assess a straightforward personal loan repayment, depending on their lending policies.
For some borrowers, this can improve available cash flow in the home loan assessment and potentially strengthen their borrowing capacity.
Every lender has different assessment criteria, so outcomes will vary depending on your financial position and the lender you are applying with.
Recently, we assisted a client who was preparing to purchase a home.
They had a novated lease that worked well while they were focused on their vehicle, but when they began the mortgage application process, it became clear the existing structure could reduce their borrowing capacity.
Rather than delaying their home purchase, we refinanced the novated lease into a standard personal car loan.
The new finance structure better aligned with their mortgage application, helping free up borrowing capacity and putting them in a stronger position to move forward with their home loan.
The vehicle remained financed, but the overall structure was better suited to their next financial goal.
Refinancing is not the right option for everyone.
However, it may be worth exploring if you are:
The key is understanding whether your current finance structure still aligns with your goals.
What worked well a few years ago may no longer be the most suitable option today.
Many people only review their finances after submitting a home loan application.
Instead, reviewing your existing commitments beforehand can help identify opportunities to strengthen your position before approaching a lender.
This may include reviewing:
Making adjustments before applying for a mortgage may provide greater flexibility and help avoid unnecessary delays during the approval process.
Not necessarily. Every lender uses different assessment criteria, and your borrowing capacity depends on a range of factors, including your income, expenses and existing financial commitments.
A novated lease often includes both vehicle finance and running costs within one arrangement. Some lenders may assess these packaged commitments conservatively when calculating borrowing capacity.
In many cases, yes. Whether this is suitable depends on your lease, financial circumstances and long-term goals.
If you are concerned your current finance structure could impact your borrowing capacity, it may be worth reviewing your options before submitting a mortgage application. A finance broker can help you understand whether refinancing is appropriate.
No. Refinancing should only be considered if it supports your overall financial goals. It is important to understand both the benefits and any potential costs before making changes to your existing finance.
Your finance needs can change as your circumstances change.
A novated lease may have been the right solution when you first financed your vehicle, but if your next goal is purchasing a home, it may be worth reviewing whether your current structure is still working in your favour.
By reviewing your existing finance before applying for a mortgage, you may identify opportunities to strengthen your borrowing position and simplify your financial commitments.
At Motorlend, we work with clients to ensure their vehicle finance continues to support their broader financial goals. Whether you're reviewing an existing novated lease or exploring refinancing options, we can help you understand the choices available so your finance works for where you're headed next. Contact us.
