Chattel mortgage

What is a chattel mortgage?

A chattel mortgage is a common way for Australian businesses to finance vehicles and other assets. The term "chattel" comes from the Old English word "chattel," which means "movable property." It refers to a vehicle, automobile, or piece of equipment you want to acquire for your business.

So what is a chattel loan? It is similar to a secured car loan for personal use, except it only applies to items acquired for business purposes. If you're a gardener, for example, and you require a ute to transport your tools from home to home, you could be eligible for a chattel mortgage.

How does a chattel mortgage work?

The lender will supply the cash for you to purchase the vehicle, and you will take ownership at the time of purchase, similar to a secured car loan for personal use. As collateral for the loan, the lender puts a 'mortgage' on the car. The financing firm will remove the mortgage after the loan and any residual value (the final balance on the car) have been paid off. You can re-finance the Residual Value or trade the car in as an alternative.

Structure

A chattel mortgage operates in a similar way to a commercial loan in that you repay the loan in monthly, fortnightly, weekly, or other agreed-upon instalments. You can opt to use a residual value or "balloon" payment to offset your monthly payments. This is a lump payment set aside at the conclusion of the loan that allows you to do one of the following:

• Trade in your car and start a new loan using the trade-in money to settle your account

• Pay down the residual and gain full ownership of the vehicle

• Refinance the residual value

Key features

• Contracts with terms ranging from 12 to 84 months are available (1 to 7 years)

• The contract can have a residual value (balloon) applied to it, allowing the monthly repayments to be flexible and managed according to your budget

• Interest rates that are fixed

• Monthly payments that are predetermined

• Costs are known ahead of time

• It is possible to use a deposit (cash or trade-in)

• When a car is employed for business purposes, a tax benefit may be available

• On their next Business Activity Statement (BAS) a GST-registered client can typically claim the GST included in the car purchase as an input credit

• The monthly repayment or the contract balloon sum are not subject to GST

• Because the loan is secured against the car, cheaper interest rates are likely to be available

Difference between chattel mortgage and lease

In certain situations, either a chattel mortgage or a lease may be the best option.

So which one is better for your company?

Lease

You pay for fair use of the car with an operational lease, which is akin to a long-term rental. The monthly payment is determined using the period and the number of kilometres driven, and it includes the vehicle's operational costs (registration, servicing, tyres, etc.). You just return the car at the end of the lease period - no hassles.

Chattel mortgage

You finance the automobile with a chattel mortgage and assume the risk of the resale value at the end of the period. Finance costs are included in your monthly payment, however, you must manage all car operational costs yourself (registration, service, tyres, and so on).

Who are chattel mortgages for?

A Chattel Mortgage may be used to finance a wide range of transportable equipment, although it is most commonly used to finance vehicles. A chattel mortgage is available to both businesses and individuals, as long as the vehicle is primarily employed for commercial purposes.

For individuals who are registered for GST on a cash accounting basis, a chattel mortgage can be a desireable option. This is because you can typically claim the GST from the vehicle's sale price as an Input Tax Credit (be sure to seek professional advice).

Pros and Cons of chattel mortgages

A Chattel Mortgage is a popular financing option for self-employed or small business entrepreneurs since it allows for a lot of repayment flexibility.

Pros

• The interest rate for a secured loan is generally cheaper than for an unsecured loan consumer vehicle loan

• Unlike a hire purchase or a finance lease, a chattel mortgage gives you ownership from the outset, making it appear in the books as both an asset and a liability (the loan).

• A chattel mortgage may have certain tax advantages. Depending on how often you use your vehicle or equipment, you may be eligible to claim an input tax credit up front, as well as interest and depreciation charges.

• Repayments can be set in stone. They may also be tailored to fit your company's cash flow.

• You can opt to make a balloon payment at the conclusion of the term. This allows your company the option of lowering monthly expenses by paying extra at the end of the term.

Cons

You must wait until tax time with a chattel mortgage to claim against your personal income tax return. You can only claim a fraction of the vehicle depreciation, interest, and operating costs if you want to claim business usage on a chattel mortgage. A novated lease, by contrast lets you claim the whole amount of the lease.

Chattel mortgage requirements

To qualify for a chattel mortgage, you must fulfil the following criteria:

• At least 51% of the time, the vehicle should be used for business activities.

• An Australian Business Number is required (ABN).

• You must demonstrate that you can repay the loan on schedule.

• Proof of your identity

• Information about the car you wish to purchase

• Your business's bank statement

What can they be used for?

A Chattel Mortgage is typically used when the funded asset will be used largely for commercial purposes (that is, the asset will be used for business more than half of the time). A Chattel Mortgage may be used to finance a wide range of transportable equipment, although it is most commonly used to finance motor cars.

Vehicles typically financed with a chattel mortgage

If you’re ready to purchase a business vehicle, speak with one of our lending specialists today to get pre-approved for a loan before you hit the dealer showroom floor.

Consumer loan & chattel mortgage differences

A Consumer Loan must have all relevant information for a customer to be able to make the most informed decision as to whether the loan product offered to them suits their objectives and their requirements. This means that all fees, charges and interest rates need to be clear on their contracts to ensure the loan product is suitable.

Business use loans, such as Chattel Mortgage contracts, do not have to provide any of this information and most Chattel Mortgage contracts will not even have the interest rate displayed on the contracts, and you are left up to your own accounting skills to determine if you are getting what you were told.

Questions? We can help.