With the Bank of England interest rate now at a level that we haven’t seen for 15 years, the market is adjusting to a new reality. In the eyes of buyers, the interest rate that you are paying is more important than ever, and rightly so. But there is another piece of the car buying puzzle that is often overlooked – depreciation.

Whilst wrapped up in the excitement of buying a new addition to the garage the resulting monthly payments become the headline figure. But the true transaction cost of interest plus depreciation is, in reality, surely more important?

A friend, who thankfully, isn’t in the industry recently made an interesting comment, stating that he was looking to buy a 911 (997) GTS because prices “never go down”. Whenever I have heard this over the years I am naturally encouraged to put some factual thought around the implications of strong residuals for vehicle financing.

In 2010 a new 997 GTS cost £76,758 (adj. 2023: £112,710) and today they retail at around £60k. In money terms, that’s a great deal for 12 years of Porsche motoring. Even adjusting for inflation that’s under £400 per month in depreciation.

There are many elements to unpack in how Porsche achieves this, but it is a mix of a strong brand, managing supply and demand, building a class leading product and having a dealer network that historically has been very reluctant to discount when selling cars…

The strength of vehicle residuals is a more involved scenario than just supply and demand. The actions of the manufacturer linger far beyond the point of sale which also has an impact on pricing. Imagine buying a new Mitsubishi in January 2021 only to discover the following month that they are ceasing UK sales. That most certainly could not have helped the residual values of existing cars in circulation as the thought of zero franchised dealer support would hardly be reassuring to any potential buyer.

In addition to this, earlier this year, Tesla announced that it was reducing the price of new cars by up to £8,000 per unit. That was great news for future new car buyers, less so for existing Tesla owners who saw their residual value plummet overnight.

“The value of second-hand Tesla cars has collapsed since the electric-vehicle maker embarked on a series of price cuts for new models,” said the Financial Times. It continued “the steeper depreciation in Tesla models potentially makes its cars more expensive in finance deals than its rivals. Under lease or personal purchase agreements, motorists have to finance the value a car loses over a funding period. This arrangement, which accounts for almost all new cars sold in the UK and is increasingly popular across Europe and the US, results in higher prices for vehicles that suffer steeper depreciation”.

Tesla’s reach for larger market share comes with a cost which is borne by their previous new car purchasing customers who are financially punished for Tesla’s market ambitions.

But it’s not all bad news – at the other end of the scale some manufacturers are able to support residuals by maintaining a high cost to change;

Examples

Audi RS6 Avant

List price when new: 2003 – £58,805 (adj. £102,241)

Good example used market price today £113,000.

Mercedes-Benz S500

List price when new: 2006 – £69,770 (adj. £114,616)

Good example used market price today: £119,070.

Porsche 911 Turbo S

List price when new: 2005 – £99,300 (adj. £166,925)

Good example used market price today: £180,600.

The manufacturers who have a proposition which allows them set pricing which outstrips inflation provide the basis of good value finance deals.

What you buy can be as important as how you buy it and this is especially true in a higher interest rate environment.

Written in association with Mark Tofts