Key Takeaways

• A novated lease may reduce assessed income, appear as a liability or both, and the lender’s method can move borrowing power by more than $100,000 on the same salary.
• An eligible electric vehicle lease is paid entirely from pre-tax salary, so taxable income falls further than with a petrol lease even when take-home pay looks similar.
• Signing after pre-approval, or paying a residual close to settlement, can squeeze your loan amount or deposit when there is little time left to adjust.
• Changing schools, sectors or states may end the novation and move lease payments to after-tax pay.

The salary packaging session at the start of the school year made it sound simple. You choose a car, pay for it from your pre-tax salary and keep more of each fortnight’s pay. For many teachers, the saving is real. Then the deposit account nears its target, and a harder question surfaces about how a novated lease affects borrowing power and whether it could change which home you can buy.

That effect can be large, and it depends less on the car than on how a lender reads the lease. The same payslip may be assessed in different ways, producing gaps of tens of thousands of dollars in the loan offered. A home loan broker for teachers who compares those policies before an application is lodged may show which reading applies to you.

A salary-packaged car usually moves borrowing power more than super contributions or meal cards, and lenders treat each part of a teacher’s salary package in its own way.

How Does a Novated Lease Show Up in a Home Loan Application?

A novated lease usually reduces the income a lender sees and may also appear as a debt, with each trace assessed separately:

Pre-Tax Deductions That Lower Your Taxable Income

Your employer pays the lease rental and bundled running costs from your gross salary before tax is calculated, and lenders typically start from the smaller figure that remains. On a salary of $118,000, a pre-tax deduction of $15,600 a year leaves taxable income of about $102,400.

Most lenders build their serviceability calculation from taxable income, or from the net pay shown on payslips, not from the gross package in your contract. You still keep the tax saving, but the lender usually sees only the smaller income that produced it. This is why a teacher’s own estimate of borrowing power can sit well above the figure a lender returns.

Post-Tax Contributions That Thin Your Take-Home Pay

Petrol and diesel leases usually add an after-tax deduction, called the employee contribution, which comes straight out of take-home pay. It exists to reduce the fringe benefits tax (FBT) that would otherwise apply to the car.

Under the statutory formula the Australian Taxation Office (ATO) applies, a car’s taxable value is 20% of its base value each year. On a car with a $60,000 base value, the post-tax contribution is often around $12,000 a year, or $1,000 a month.

Lenders that cross-check income against bank statements will see these smaller salary credits. An eligible electric vehicle (EV) works differently. Because it may be exempt from FBT, many EV leases carry no post-tax contribution, and the whole cost comes out before tax.

Lease Commitments That May Sit in Your Liabilities

Some lenders record the finance rental as a monthly repayment, much like a car loan, and subtract it from the surplus left after living costs. The remaining term and amount owing are recorded against it.

A lease with a large residual at the end may be assessed as a bigger total debt than the monthly rental suggests, particularly at lenders that measure total borrowing against income.

Running Cost Budgets That Lenders May Count Twice

Packaged running costs may be counted twice, because they leave your income through the pre-tax deduction and then reappear in the lender’s living expense estimate. Fuel or charging, registration, insurance, servicing and tyres are often bundled into the lease. Lenders typically set living expenses at the higher of your declared spending or a benchmark of typical household spending that already includes transport.

Some lenders may trim the transport component when a packaged running-cost budget is clearly documented. Many will not, so a teacher paying $250 a month in packaged running costs may carry that cost twice in the assessment.

Finance Contracts That Stay in Your Name

Your employer makes the payments only under a deed of novation, which lasts while you work there and the arrangement remains in place. When that employment ends, the obligation typically returns to you, because the finance contract was always yours.

For a permanent teacher with years of service, this rarely changes the assessment. For a teacher on a fixed-term contract, or one planning a move, a lender may look harder at whether the lease would still be affordable from after-tax pay.

Which Methods Do Lenders Use to Assess a Novated Lease?

Lenders generally assess a novated lease by reducing your assessable income, by restoring that income and counting the rental as a debt or by doing both. The method can matter as much as the size of the lease. The approaches you are likely to meet are:

Reduced Income Method

The lender assesses you on the lower taxable income shown on your payslips and does not list the lease again as a debt.

The tax saving flows through to your net income, which softens the impact. For many teachers, this is the most favourable reading, because only the after-tax cost of the lease reduces the surplus.

Add-Back Method

Here, your pre-tax deduction is restored to income and the finance rental is then counted as a monthly commitment. It sounds generous, because your full salary is recognised.

In practice, it can produce a lower result than the reduced income method, because the lender counts the whole rental while ignoring the tax the lease saves you.

Double-Count Method

One lease reduces borrowing power twice under this method, because the lender uses the reduced taxable income and also lists the lease as a liability.

This method tends to create the widest gap between the loan planned and the loan offered. It may appear where a lender cannot tell from the documents whether the lease is already reflected in the payslip.

This is a general guide only. Lender policies change regularly, and one lender may apply different methods to different products or borrower profiles.

How Much Can a Novated Lease Reduce Your Borrowing Power?

On a teacher salary of $118,000, a $60,000 novated lease may reduce borrowing power by roughly $110,000 to $240,000, depending on the lender’s method and the rate used to test your repayments:

Worked Example Based on a $118,000 Salary

The illustration assumes a $60,000 EV lease, a 30-year loan tested at 9%, a finance rental of $1,050 a month and packaged running costs of $250 a month, which together make a pre-tax deduction of $15,600 a year. It also assumes the 30% marginal tax rate and 2% Medicare levy that apply at this income in 2026–27.

These figures are illustrative only. They exclude other debts, dependants and individual living expenses, all of which vary between applicants.

The reduced income figure reflects the $15,600 deduction lowering take-home pay by about $880 a month after tax. The other two rows reflect the lender counting the $1,050 finance rental as a commitment. Between the first and last rows sits a gap of more than $100,000, on the same salary, the same car and the same lease.

At a 9% assessment rate over 30 years, every $100 of monthly surplus lost removes roughly $12,400 of borrowing power.

EV Lease Compared With a Petrol Lease

An eligible EV lease usually lowers taxable income more than a petrol lease on a similar car, even when take-home pay barely differs. The whole EV cost comes out before tax, while a petrol lease splits the cost between a pre-tax deduction and the post-tax employee contribution.

For a lender that works from taxable income, that difference can make the EV lease look heavier on paper. The ATO notes that the EV benefit, though exempt from FBT, is still reportable, so a grossed-up amount appears on your income statement.

Where a lender works from net pay instead, the two leases may look similar, which is why the EV and petrol versions of one car can produce different results at different lenders.

Under FBT law, plug-in hybrids have not counted as zero or low emissions vehicles since 1 April 2025. The exception is arrangements that were already exempt and financially committed before that date.

Lost Surplus Tested at the Buffered Rate

Each dollar a lease removes from your surplus cuts the maximum loan by more than its real cost to your budget, because new home loans are tested at a rate well above the one you would pay. The Australian Prudential Regulation Authority (APRA) expects lenders to assess at the loan rate plus a buffer of three percentage points, a setting APRA confirmed on 28 May 2026.

The buffer applies to the home loan you are asking for, not to the car lease.

Lease Balance Counted Towards the Debt-to-Income Limit

A lease balance may push a teacher’s total debt past six times income. Since February 2026, APRA has limited lending at that level to 20% of each bank’s new owner-occupier loans, with a separate 20% limit for investor loans. APRA left this debt-to-income (DTI) limit unchanged at its May 2026 review, and whether a lease balance counts towards total debt depends on the lender.

Take a teacher earning $118,000 who applies for a $700,000 loan. The home loan alone sits at about 5.9 times income. Add a remaining lease balance of $45,000 and the total may pass six times, which could place the application in the smaller pool of high-DTI loans a bank can approve. Lenders manage that pool differently, and some may ask for a lower loan amount or stronger evidence before approving.

Which Car Finance Option Affects Borrowing Power Least?

Paying outright usually has the smallest effect on serviceability and a salary-packaged lease the least predictable, with borrowed finance sitting in between:

Novated Lease

Tax savings and bundled running costs come with an assessment that varies more between lenders than any other option. The lease also ends with a residual that must be paid, refinanced or rolled into a new lease on a fixed date.

Secured Car Loan

Taxable income stays untouched, and the loan appears as one monthly repayment in your liabilities. Lenders usually assess it at the actual repayment, so its effect is easier to forecast.

There is no tax saving. The balance still counts towards total debt, and a loan with a balloon payment may be assessed more heavily as that balloon approaches.

Unsecured Personal Loan

Personal loans are assessed much like car loans but usually carry a higher rate and a shorter term. For the same car, the monthly repayment tends to be larger, so borrowing power falls further per dollar borrowed.

They also sit on your credit file, and several recent credit applications may prompt questions from a home lender about your spending and commitments.

Cash Purchase

The trade-off for leaving serviceability untouched sits in your savings. Money spent on a car is not available for a deposit, stamp duty or a buffer after settlement.

A smaller deposit can mean paying lenders mortgage insurance (LMI) or waiting longer to buy, although some lenders offer teacher LMI waivers to eligible borrowers. A large withdrawal may also interrupt the record of genuine savings some lenders look for.

How Does Lease Timing Affect Your Home Purchase?

A lease tends to cause the most trouble when it starts after conditional approval or ends close to settlement, though other points in its life also shape the loan:

Signing a Lease Before Pre-Approval

The approved amount already reflects a lease that exists when you apply, so the main risk sits in the pay cycle. Where the lease is signed but deductions have not yet reached your payslips, a lender may ask for the lease quote or schedule and estimate the commitment itself.

Waiting for one or two payslips showing the actual deductions may give the lender firmer figures.

Signing a Lease After Pre-Approval

A lease signed after pre-approval may lower the amount approved at formal approval. Lenders generally expect a new finance commitment to be disclosed as a change in circumstances and may reassess with it included.

Where that reassessment comes after you have signed an unconditional contract, a lower approved amount could leave a gap between the loan and the purchase price.

Carrying a Lease Into Its Final 12 Months

Many lenders assess a lease as it stands until it is paid out or ended, even with only months left to run. Some may give less weight to a commitment about to finish, particularly where a payout plan is documented.

Paying the Residual Near Settlement

Keeping the car at the end of the lease means paying the residual, or balloon, from after-tax money. Under long-standing ATO guidance on car leases, minimum residual values run from 65.63% of the car’s cost for a one-year lease to 28.13% for a five-year lease. On a $60,000 car, that is about $16,900 after five years, or about $28,100 after three. Providers may set a residual above these minimums.

A residual falling due within a few months of settlement competes with your deposit, stamp duty and moving costs. Paying it from savings lowers the funds a lender sees, refinancing it as a car loan creates a new debt to be assessed and rolling into a new lease starts the assessment again with a fresh rental. Checking the residual amount and due date before choosing a settlement date may prevent a clash.

Signing an EV Lease Before April 2027

Signing before April 2027 matters mainly for EVs costing more than $75,000, since a lease committed to before then may keep the full FBT exemption, although its rental still reduces borrowing capacity for any purchase that follows. The Australian Government announced the change on 5 May 2026 as part of the 2026–27 Budget. Under the announced electric car changes, the full exemption continues until the end of March 2027.

From 1 April 2027, eligible electric cars costing $75,000 or less would stay fully exempt, while those above $75,000 and below the luxury car tax threshold for fuel-efficient vehicles would receive a 25% discount on FBT. From 1 April 2029, all eligible electric cars below that threshold would receive the 25% discount. The ATO has indicated that existing leases will not be affected, and it lists the fuel-efficient threshold for 2026–27 as $91,661.

The measure is not yet law. Exposure draft legislation was released for public consultation in September 2026, so the details could still change. Whether a refinance or a change of employer counts as a new commitment may turn on the final wording, which could affect whether an existing lease keeps its current treatment.

For a teacher planning to buy in 2027, comparing the expected tax saving over the lease term with the likely reduction in borrowing power at the time of applying may give a clearer answer than the deadline alone.

Starting a New Lease After Settlement

A new lease signed after settlement leaves your current loan unchanged but will be counted in your next application, whether that is a refinance, an upsize or an investment purchase. Teachers expecting to refinance within a few years sometimes time the next lease so it does not start just before that assessment.

Which Teaching Career Changes Can End a Novated Lease?

Several common teaching career events may end or pause the novation and shift lease payments to your after-tax pay:

School Sector Change

Moving between a government school and a Catholic or independent school usually means a new employer, which ends your current novation. Each employer decides whether it offers novated leasing and through which provider.

Where the new school offers it, the lease can often be re-novated. Where it does not, you become responsible for the payments from after-tax pay, and running costs may no longer be bundled. For an EV lease, the employer change may also affect which FBT treatment applies once the announced changes begin.

A lender assessing your application mid-switch may see a higher after-tax commitment and a new employment start date at the same time. Lenders weigh that start date when a teacher is changing schools before applying, and some ask for a letter confirming continuous service.

Interstate Transfer

Teaching in another state means joining a different education department with its own salary packaging arrangements. The lease can often be transferred to the new employer, but there may be a gap of one or more pay cycles before deductions restart, and during that gap payments typically fall to you directly.

Lenders assessing an interstate move usually want payslips from the new role, and applying before the new deductions appear may leave the lender estimating the lease, often conservatively. Until those payslips arrive, a signed teaching contract may support the income side of the application, depending on the lender.

Contract End

A fixed-term contract that ends without renewal usually ends the employment the novation depends on, so lease payments may fall to you until a new role starts. A new contract with the same employer may allow the lease to continue, depending on how the employer treats the break.

Renewal history usually carries weight with lenders assessing a fixed-term teacher, and a lease that could revert to after-tax pay between contracts may add to their caution.

Parental Leave

During employer-paid parental leave, lease deductions may continue from that pay, depending on your school’s arrangements. Government-funded Parental Leave Pay is a separate payment. Once employer-paid leave ends, whether lease deductions can continue depends on your employer’s payroll arrangements, so payments may need to come from after-tax funds.

Your confirmed return-to-work income is often the figure a lender focuses on during parental leave. The lender may also ask how the lease will be covered until you return, particularly where savings would carry the rental in the meantime.

Long Service Leave

Long service leave is paid, so lease deductions typically continue from your leave pay. Where your employer allows the leave to be taken at half pay, the fixed rental takes a larger share of a smaller pay for a longer period.

During extended leave, a lender may weigh your leave pay alongside your confirmed return-to-work income.

Unpaid Leave

Without a salary to deduct from, the rental and running costs typically fall to you for the length of the leave. A term of leave without pay can mean covering several thousand dollars from savings, with no tax saving attached.

Those payments may be counted against your savings buffer when you apply during or just before unpaid leave. Lenders assessing home loans during unpaid leave also look at how long the leave runs and the confirmed return date.

Reduced Hours

Dropping to part-time hours reduces your salary while the lease rental stays the same, so the lease takes a larger share of a smaller income.

A lease signed on full-time pay can reduce borrowing power more than planned once you return part-time. Modelling the loan on the new hours, with the lease included, may show the figure a lender is likely to reach.

Casual Relief Work

Casual and relief teachers may have limited access to novated leasing, depending on the employer and how they are engaged. Some education departments extend salary packaging to casual staff, while relief teachers working across several schools or agencies may not have a single employer able to administer a lease.

Without novation, a lease typically operates as a standard finance commitment paid from after-tax income. Lenders already assess casual income carefully, so a broker for relief teachers may help present both the income and the lease clearly.

Which Steps May Reduce a Novated Lease’s Effect Before Applying?

Several steps may reduce a lease’s effect, depending on your deposit, the lease terms and the lender:

Documenting the Lease

Full lease documents let a lender see exactly what a payslip deduction covers, which may stop it applying the double-count method by default. A payslip line marked only ‘packaging’ leaves the lender guessing.

The lease schedule usually helps most when it shows the finance rental separately from running costs, alongside the deed of novation, a current payout figure and the residual amount with its due date. Payslips that itemise the pre-tax and post-tax deductions separately make the picture clearer. Document requirements vary between lenders.

Choosing the Lender

Lender choice may change borrowing power more than any other single step, because the gap between lender methods is often larger than the difference a cheaper car or shorter lease would make. A specialist mortgage broker for teachers may compare how several lenders would assess the same payslip before any formal application is lodged.

Paying Out Early

An early payout removes the commitment, and taxable income returns to its full level on your next payslips, but the payout must come from after-tax money and usually includes any early termination fee.

For a teacher with a large deposit and a lease near its end, an early payout may lift borrowing power noticeably. Where the deposit is only just enough, the same payout could leave too little for the purchase, costs and buffer. Lenders typically want a payout letter or closure confirmation before removing the lease from their calculations.

Selling the Car

Where the sale price covers the payout, the proceeds can end the lease without touching your deposit. Where the car sells for less, the shortfall would need to come from savings.

You may also need another car, and financing a replacement just before applying could create a new commitment for the lender to assess. This step tends to suit teachers with a second household car or a short commute.

Varying the Term

Extending a lease term may lower the monthly rental, which could reduce its effect on serviceability. The trade-off is a longer commitment, more interest over the life of the lease and a residual set for a different date.

Not every provider allows a variation mid-lease, and some treat it as a new lease with fresh costs. For an EV, a variation made after the rules change may raise questions about which FBT treatment applies.

Borrowing Power That Survives the Salary-Packaged Car

A novated lease rarely has to decide which home you can buy. Whether the lease stays, ends early or waits for a better moment usually becomes clear once a lender’s likely reading of your payslip sits beside the tax the lease saves.

The car gets you to school each day, and the home is the longer goal. With the timing worked out before either contract is signed, the two can usually sit together.

If you are weighing up a novated lease alongside a home purchase, the team at Education Home Loans can talk you through the options that suit your circumstances.

Frequently Asked Questions (FAQs)

1. Does a novated lease show on my credit report?

In many cases, yes. The finance contract behind the lease is in your name, so the provider may report it like other consumer finance, including its repayment history.

Repayments made on time through payroll can build a positive record. A home lender reviewing your file may see the account, and complete lease documents help it match that entry to your payslip deductions.

2. Can my partner’s novated lease reduce our joint borrowing power?

Yes. On a joint application, the lender assesses both incomes and both sets of commitments, so a partner’s lease reduces the combined surplus just as your own would.

The lender’s method applies to each lease separately. Where one partner has a lease and the other does not, the unpackaged income may carry more of the servicing, but the lease still reduces the total the household can borrow.

3. Does a novated lease affect refinancing my existing home loan?

It can. Refinancing with a new lender involves a fresh serviceability assessment, and a lease signed since your original loan will be counted under the new lender’s method.

Where the lease reduces the surplus enough, you may qualify for a smaller loan, or with fewer lenders, than when you first borrowed. A refinance broker for teachers may help identify lenders whose lease policy fits before an application is lodged.

4. Will a novated lease affect my eligibility for the 5% Deposit Scheme?

A novated lease does not usually affect eligibility for the Australian Government 5% Deposit Scheme, formerly the Home Guarantee Scheme. The scheme is administered by Housing Australia, and its criteria focus on the buyer, the property and the purchase.

The lease can still affect the loan amount, because the participating lender assesses serviceability under its own policy, lease included. Eligibility and approval are separate steps, and a first home buyer broker may check both before you start making offers.

5. Do lenders treat the reportable amount on an EV lease as income?

Generally not. An eligible EV lease is exempt from FBT, but the grossed-up value of the benefit still appears on your income statement as a reportable fringe benefit. That amount is not cash you receive, so most lenders do not add it to assessable income.

A lender may still ask about it when comparing your income statement with your payslips, and knowing what the figure represents can save a follow-up request.

6. Can I pay out a novated lease using my home loan at settlement?

Some lenders allow a car lease to be paid out through the home loan at settlement, where serviceability and the loan-to-value ratio support the larger loan. The lease commitment disappears, which may improve the assessment, but the car’s cost is then spread over a much longer term.

Paying for a depreciating car over 30 years usually means more interest in total, and the tax saving from packaging ends. We can show how the numbers compare under different lenders’ policies, and in most cases our service is paid by the lender, with no fee to you.

This article provides general information only. It does not take into account your objectives, financial situation or needs. You may wish to speak with a qualified professional, such as a licensed credit adviser or registered tax agent, before acting on any of this information.